The Real Cost of Living

To those of us keeping a close eye on our finances, the official 3, but to most UK households, a 3 - over three times the official inflation rate of 3 yearly rise in average prices - it could be argued that the 3 falls short of so many real-life experiences. One explanation is that CPI does not include council tax and mortgage costs - two major expenses to any homeowner. But RPI does include these, and even RPI inflation is only 4.2 inflation is by no means a low rate of inflation, but it's a lot better than 9.5 could be devastating to the economy. In times of uncertainty, a large part of recovery is down to consumer and lender confidence.

High inflation means money is technically worth less - so people are poorer, and spend less. If companies give pay rises in line with high inflation, the prices which cause inflation are sustained, and may continue to rise. If they reach a certain point too quickly, demand will suddenly fall - meaning business are stuck with high costs that are not being met by demand, and may be forced to make cutbacks. If this results in above-average unemployment, companies are hit by a further reduction on demand, which could lead to further cutbacks - potentially sparking economic recession.

The rise in costs of living may well be higher than inflation would suggest - but the inflation rate affects consumer confidence. In this sense, an unrealistically low inflation figure could in fact save the economy from further damage.

Is it accurate?
Thirdly, a 9.5 more of their disposable income on things like CDs, DVDs, books, trips to the cinema, and pints of beer than they did this time last year.

With that in mind, could it be that grouping a 'basket of goods and services' together and measuring the average rise in costs isn't accurate enough? With increases in essential costs of living varying so wildly from that of other goods and services, it might be more accurate to release different figures for different areas of the economy - only then would it be clear just how much are costs are rising, where they are rising, and how much of a problem it is.

However inflation is measured, the Real Cost of Living Index is an important figure. It measures costs which have a huge impact on how much we have left as disposable income. Regardless of whether they publicly acknowledge it, the Government may well take a 9.5% rise in these costs very seriously.