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# Inflation calculator: How does it work?

## UK Economy

The Office for National Statistics (ONS) calculates inflation using a basket of goods.

## CPI categories

1. Food and non-alcoholic drinks
2. Alcoholic drinks and tobacco
3. Clothing and footwear
4. Housing, water, electricity, gas and other fuels
5. Furniture, household equipment and routine maintenance
6. Health
7. Transport
8. Communication
9. Recreation and culture
10. Education
11. Restaurants and hotels
12. Miscellaneous, including haircuts, insurance and jewellery

There are many products and services in the basket, and every month the ONS checks their prices and uses them to calculate inflation.

But it is not quite as simple as that. The price of things that you might buy every day such as bread or milk is more important than something you might buy less than once a month such as a haircut.

So the ONS has weightings to reflect how often particular products are purchased.

The basket of goods and services is divided into 12 broad categories, and every year the ONS comes up with weightings for each category based on how often they are bought by an average person.

But you are not an average person, and the inflation calculator is designed to give you a tailored inflation figure that reflects the sort of things you are likely to buy.

Fresh weightings

In order to give an inflation figure for households like yours, you need to come up with fresh weightings, which can then be used each month with the ONS figures for how much prices have risen or fallen in each of the 12 categories.

Previous inflation calculators have asked how much the user has spent on each of the 12 categories in the past month, but that has presented problems such as many people not knowing the answers and also that things in many categories are bought less than once a month.

## More details

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Michael McMahon and his students in the economics department at University of Warwick investigated which household characteristics were important in determining a household's rate of inflation.

The seven factors they came up with were the size of a household, how many children were in it, its total income and location, the age and employment status of its highest earner and the age at which he or she left full-time education.

Then, using the ONS family expenditure survey, which allowed them to take into account both regular spending and one-off purchases, they built a statistical model to come up with fresh weightings for each of the 12 categories based on the seven factors.

## More on This Story

### UK Economy

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1.
GERMANY'S GAS 11:31:

The International Energy Agency carries this report highlighting Germany's dependence on Russia for its natural gas imports. In 2010, the country supplied 39% of all Germany's imported gas through a number of cross-border pipelines. That's a lot of exposure.

2.
WI-FI WARNING 11:17:

Some comment on the Europol wi-fi warning we mentioned earlier. David Emm, senior security researcher at Kaspersky Lab explains: "What if the wi-fi network you're connecting to doesn't belong to the coffee shop, restaurant, hotel or airport lounge? What if it's masquerading as the real one?... This method, known as a 'man-in-the-middle' attack, can be used to capture any confidential data you type-in and get access to what's on your device..."

3.
AIRBUS ORDERS CUT 10:54:

Airbus reveals about a third of its plane orders have been cancelled. Although it pulled in a good number of orders at last month's Singapore Air Show, it had 33 cancellations, thanks to airline restructurings in Serbia and Indonesia. Its still just beating arch-rival Boeing.

4.
BOOHOO HELLOO 10:45:

Big bucks for the online fashion retailer, Boohoo.com. The eight-year old company is joining the stock market next week - and it says investors are valuing it at £560m. Boohoo sells clothes aimed at 16-to-24 year olds. It raised £300m from investors.

5.
JOB TITLES 10:30:

What do you really do? That's the question NPR's Planet Money asked of its social media followers. It suggested they send in pictures of themselves at work, and explain their obscure job titles. We on Business Live would like to send a similar questionnaire to many a company... we won't but you can contact us - bizlive@bbc.co.uk and @bbcbusiness.

6.
APPLE TAX 10:22:

According to the Irish Times, Apple paid just \$36m of tax on \$7.11bn worth of profits at its Irish unit. Apple Sales International, which is based in Ireland, managed to cut its tax bill by more than \$850m between 2004 and 2008, the paper says.

7.
BOSS'S BLUES 10:14:

The owner of Birmingham City football club, Carson Yeung, has been jailed for six years for money laundering. A court in Hong Kong convicted him of laundering £55m through several bank accounts between 2001 and 2007.

8.
GRACIOUS GOLDMAN 10:00:

Goldman Sachs has reacted with glee after the man behind the spoof @GSElevator Twitter account lost his book deal. John Lefevre's identity was revealed last week by the New York Times, and it emerged he never actually worked for the firm. "Guess elevators go up and down" tweeted the investment bank.

9.
SONY SELLS 09:46:

The beleaguered Japanese firm Sony is selling off its Tokyo headquarters, which it has inhabited for 60 years. The deal, worth 16.1 billion yen (£93m) comes as the company forecasts huge losses because of its failing PC business.

10.
11.

tweets: "Just interviewed #Minecraft legend @stampylongnose on @bbc5live. More YouTube followers than Justin Bieber."

12.
CROSSRAIL DEATH 09:15:

A Crossrail spokesperson has issued a statement: "Sadly, at approximately 5am this morning a contractor working at our site in Fisher Street, London was fatally injured. Our first and foremost thoughts are with the family and friends affected by this. The next of kin are being informed. We are establishing the facts and a full investigation into the incident has commenced."

13.
LAGERFELD HOTELS 09:08:

Chanel's Karl Lagerfeld is moving into hotels. His first will be in the Chinese gambling enclave of Macau. It will have 270 rooms and is scheduled to open in 2017. "An entire hotel designed by me. It's the first time for me! I think the idea is great!'' said Lagerfeld in an enthusiastic statement.

14.
VISA EASING 08:59: Radio 5 live

The Recruitment and Employment Confederation says businesses need visa rules relaxed because they are having trouble finding UK workers for certain skilled roles. "Negative rhetoric on immigration from politicians fails to consider the immediate needs of British businesses, the confederation's boss, Kevin Green, tells Radio 5 Live.

15.
CROSSRAIL DEATH Via Twitter BBC London 94.9

tweets: "43-year-old construction worker dies from head injuries at Crossrail site in Holborn. Fire crews tried to rescue him 10m down a tunnel."

16.
BITCOIN TOO VIRTUAL 08:49:

Japan's government said overnight that Bitcoin was not a currency, but it said it was looking at how to tax transactions carried out in it.

17.
WHERE'S THE BEEF? 08:42:

The vegetarians are winning in the battle for Argentina's economy. Italian newspaper La Stampa reports on how the country's gauchos, or cowboys, are moving from rearing cattle to growing soy. President Cristina Fernandez de Kirchner has pushed measures to keep farmers cultivating the crop, as its price has risen sharply.

18.
CHINA BOND DEFAULT 08:33:

The BBC's man in Beijing, John Sudworth, reports: "In other markets this would not be big news... It is a first for China. Up until now, banks and local governments have always stepped in... fearing loss of confidence. But this time the authorities have decided to let bond holders take a hit and at least one analyst has warned of a possible "Bear Stearns" moment, a reference to the collapse of the New York bank in 2008 and the wider Wall Street meltdown that followed."

19.

Ukraine's precarious finances are the talking point on the Today programme. The executive director of BCS Financial Group points out Ukraine needs a significant restructuring. He reminds us that Ukraine has been in and out of IMF programmes since the collapse of the Soviet Union.

20.
EUROPE MARKETS 08:19:

Europe's stock markets have opened higher - just. The FTSE 100 is up 0.2% at 6,788.49. In France, the Cac-40 is up 0.6% and Germany's Dax scrapes a rise on 0.1%. In the US, the S&P last night pressed further into record territory with its third all-time high of the week, up 0.2% at 1,877.03.

21.
ALLIANCE TRUST 08:07:

Overall, it's been a positive year for the Scottish investment firm. In posts a pre-tax profit of £462m in 2013, compared with £253m the year before. Good news for shareholders too - dividends will rise by 12.5% to 10.83p.

22.
AGA COOLS DOWN 07:58: Radio 4

William McGrath, chief executive of Aga Rangemaster, tells the Today programme 70% of Agas sold run on electricity. And the ancient-looking product can be turned on and off by a smartphone. The company is also pushing to sell in China.

23.
ALLIANCE TO WHOM? 07:52:

An interesting nugget in Scottish firm Alliance Trust's financial report: "The referendum in September is creating uncertainty for our customers and our business, which we have a responsibility to address... To give them full confidence, we have started work to establish additional companies registered in England."

24.
'TAKE A STAND' 07:42:

The Economist, out today, strikes a strident tone on the crisis in Ukraine. "It is time to impose visa bans and asset freezes on regime-connected Russians" it says. The West, it continues, ought to "cut Kremlin-friendly financial firms from the global financial system" and "prepare for an embargo on Russian oil and gas".

25.
SCOTTISH REFERENDUM Douglas Fraser Business and economy editor, Scotland

tweets: "Alliance Trust, Dundee, CEO Katherine Garrett-Cox on #indyref: 'We've started establishing additional companies registered in England'"

26.
AGA COOLS DOWN 07:23:

Aga, which calls itself "the kitchen living specialists" but is best known for its Archers-style ovens, reports profits of £1.1m for last year, lower than 2012's £1.7m. Sales of the hefty cast iron cookers rose by 10%. It also owns Fired Earth tiles and Rangemaster ovens. Somewhat surprisingly for an up-market company, Aga says its being helped by Help to Buy.

27.
AUSTERITY 2.0 07:06:

Cuts could be with us for a while longer. Using models it claims are used by the Office for Budget Responsibility (OBR), the FT says George Osborne faces a structural budget deficit of £20bn, despite the speed of the economic recovery. It says this would necessitate further spending cuts by the next government.

28.

tweets: "Morning from Cheshire. We're at a factory offering some of the 500,000 new apprenticeships. More on @BBCBreakfast." Nice to see Ben out and about.

29.
CHINA BOND DEFAULT 06:47: Via Blog Linda Yueh Chief business correspondent

blogs: "In China, it's not what normally happens. But as the country develops its financial sector, defaults and bankruptcies are part of the usual course of how markets operate."

30.
WI-FI WARNING 06:41:

Banking technologies firm FIS has joined forces with Microsoft and the European crime enforcement agency Europol to warn people against using public wi-fi networks for sensitive transactions. The collaboration will "enable them to strengthen their forensic and technical analysis of malware and botnets" and co-ordinate "enforcement actions against cybercriminals", according to the fulsome press release.

31.
AFGHAN AID 06:27:

The Independent Commission for Aid Impact (no, we'd never heard of them either), has assessed the efficacy of five UK aid programmes to Afghanistan worth £97.7m. Its report concludes that while "Afghanistan is one of the most difficult places to deliver aid", the projects are not providing value for money and ought to be reviewed.

32.
UKRAINE CRISIS 06:16: Radio 5 live

Energy is the main talking point on Wake up to Money as the Ukraine/Crimea crisis continues. Mikhail Krutikhin, a partner at Rusenergy, says he can't see any serious impact on energy supplies as "It is mutually important for the West and Russia. Russia can't do without the revenue and Europe can't do without gas".

33.

Thousands of solicitors and barristers are to stage a walk-out today at courts in England and Wales over cuts to legal aid. The government plans to reduce fees for criminal barristers as part of aims to save more than £200m pounds from the legal aid budget.

34.
06.03: Rebecca Marston Business reporter, BBC News

Ahead of those figures, we'll bring you the top stories to emerge this Friday. The most interesting company on the list of those reporting appears to be posh oven maker Aga.

35.

Good morning. The biggest news of the day will come from the US later on, as the latest unemployment figures, known as non-farm payroll, will be unveiled. The weekly jobless figures, which we don't usually report, were promising. The markets, as usual, will be keeping a keen eye out.

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