Go Figure: Why do people inflate inflation?

Composite showing girl with doll, woman in white T-shirt and boy holding camcorder Some items have become cheaper over the past decade

Prices only seem to be going one way and that's upward. But contrary to popular belief some items have become cheaper. Why do people's perceptions of inflation tend to be higher than the official rate, asks Michael Blastland in his regular column.

The task for Go Figure is to see statistics differently. But what can you say about prices that isn't gloomy? Double digit increases in gas and electricity while pay and benefits are mired - you need a really thick coat of gloss for that.

But what the heck, let's try anyway.

For example, something must have gone down. If overall inflation is still kicking around at about 5% but some prices are screaming in at plus 20%, others must be more modest.

So I asked the ONS for a few examples covering a range falling prices over the past 10 years. Here's a selection.

Item Average August 2001 Average August 2011 Price change %

Camcorder

£381.24

£247.50

-35.1%

Women's plain T-shirt

£12.48

£8.25

-33.9%

Model road vehicle

£4.38

£3.34

-23.7%

Sleeping bag

£34.89

£29.61

-15.1%

Child's plastic doll

£11.68

£10.69

-8.5%

Hi-fi

£204.14

£193.94

-5.0%

Electric cooker

£369.30

£361.81

-2.0%

These are messier than they look because they try to take in the value of quality changes as well as pure price changes. That's an inexact science.

Still, it looks like there've been big falls in the categories of audio-visual - new technology often gets cheaper - and clothing and footwear. Not that we notice much. Rises tend to strike us more than falls.

That's compounded because we only buy new technology every so often but we pay energy bills every month. And food bills, which have also been rising fast, more often again.

Cost of living indices compiled by newspapers usually pick on these salient items - those paid often and rising fastest - and ignore others. For these reasons, perceptions of inflation tend to be higher than the official rate.

So, having now highlighted the falls, just for a change, do they make much difference to our gloom?

The main ONS inflation data tables go back 15 years. Let's have a look at what's been going up most. Energy prices are in there, but surprisingly, at 136% over 15 years, not at the top.

Among the broad categories of goods and services used by the ONS, that dubious distinction goes to transport insurance, far worse than energy, up 238% in 15 years. And I thought price-check websites were improving competition and cutting costs.

Mind you don't fall off your chair backwards as you gaze up at this:

Graph of price rises

Next, let's compare these with some of our price falls:

Graph of rising and falling prices

Not much consolation, eh? Because from this chart it looks as if even the biggest falls are far smaller than the rises, even supposing you're happy to have a camcorder instead of a warm house. The lines that go up, go up way further than the lines that go down go down.

So it's hard for the falls to cancel out the rises, no matter how big the falls. You can give things away, literally, make the price zero, but they can never match a 101% price rise elsewhere for goods and services that were once equivalent.

This makes perfect accounting sense. If the cost of your basket of goods is higher, after all ups and downs are taken into account, well then, it's higher. Full stop.

But it also feels weird that a price that doubles can have twice the effect of a price that halves. In an odd way, falling prices just can't compete.

Can we make this disparity look better? Sure can. We can construct a "what you get for your money index".

This says that if audio-visual prices fall by 90%, you can get 10 times as much stuff for your money as you used to. Whereas if energy prices triple, you can only get one third as much energy for your money as you used to.

If we reconstruct the data as just such a "how much you could get index", we can make the good news look way bigger than the bad news.

Graph of prices

Persuaded? Me neither.

If you want silver linings to rising prices, you have to start saying controversial things like inflation is a great way to cut the value of debt. And savers everywhere will hate you for it.

Or that rising energy costs help deter us from frying the planet. Or that higher transport insurance persuades us to walk instead of drive and so throws a straw at obesity.

Petrol prices at a petrol station in Essex The rising cost of petrol, as well as transport insurance, might convince people to ditch their cars

There's some truth in this.

Higher prices do encourage the search for alternatives. Hence we're encouraged to shop around for our energy. And if we did, our personal inflation would be lower. But shopping around for a new energy system, that takes longer. Meanwhile, we're poorer.

In fact, far from spreading around the gloss, Go figure would argue that inflation has been an even bigger problem than often acknowledged. That some large bits of the economy - manufacturing for example - were stuffed less by the credit crunch in 2008, than by inflation.

This was roaring away on their raw material and other input costs at 37% in 12 months from mid 2007 to mid 2008, strangling profit well before anyone was talking about Lehman Bros and the banks.

And that's not 37% on some prices, it's 37% on the average of all prices, to repeat, in 12 months. Prices that they were not generally passing on to consumers.

So there. Think yourselves lucky. At least it's not the 1970s. Which is about the best that you can say. It could be a lot, lot worse. In fact, for a long period, we'd have taken 5% inflation gladly.

Does that make you feel better? No, didn't think so.

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