Business

Inflation calculator: How does it work?

Basket of goods with a calculator in

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

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.

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.

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