How does the CPI “basket” measure inflation, and what’s changed this year?

After a long period of rapidly rising prices, it appears that inflation is finally starting to slow down.

In the 12 months to April 2023, inflation was measured at 8.7% year-on-year. Yet now, the latest Office for National Statistics (ONS) data shows that inflation had fallen to 2.3% in the 12 months to April 2024.

But you may be wondering where these figures come from, how they’re calculated, and what they mean for you.

The answer is to do with the Consumer Prices Index (CPI) and a “basket” of goods and services that it tracks.

Read on to find out how the CPI basket works, and why the headline inflation figure might not actually mean that much to you.

The CPI basket provides a benchmark to measure changing prices

The CPI basket is essentially an index of different common goods and services that we all purchase regularly. As of April 2024, there are 12 different categories of items you might buy in the basket. This includes:

• Food and non-alcoholic beverages
• Clothing and footwear
• Housing and household services (including electricity, gas, and other fuels)

• Furniture and household goods
• Recreation and culture.

The purpose of the CPI basket is to provide a set list of items that the ONS can use to measure how prices of different items across these 12 categories move over time. This data is then aggregated into the single figure that you might see in the news each month and compared to prices last year.

For instance, using the latest figure of 2.3% in the 12 months to April 2024, that means across all these different goods and services included in the CPI basket, prices are 2.3% more expensive than they were in April 2023.

It’s also worth noting that although the headline inflation figures have decreased over the past couple of months, this does not mean that prices are falling. That’s because of the difference between:

• “Disinflation”, which is when inflation is falling from its previous level, but prices are still rising

• “Deflation”, which is when prices are recorded to be falling and inflation goes below 0%.

We’re currently in a period of disinflation where inflation might be lower than it was last year, but is still rising.

For example, imagine that your shopping cost £100 in April 2022. CPI inflation in the 12 months to April 2023 was 8.7%, which means that, in theory, that same shopping would have cost you £108.70 a year later.

Then, in the 12 months to April 2024, inflation was recorded as 2.3%. This is cumulative on top of the previous increase to £108.70. So, that would mean your shopping now costs £111.20.

As you can see, while the jump is smaller than it was between April 2022 and 2023, the cost of your shopping has still increased. In other words, even though inflation has slowed, prices are still increasing.

Consumer habits change over time, and so do the goods in the basket

To ensure that the CPI basket continually reflects consumer habits, the ONS updates the goods and services in it each year. Products or services that have increased in popularity tend to be added, while those that consumers buy less often are removed.

This year, we’ve seen the addition of air fryers, gluten-free bread, and spray oils, all of which have become more popular with consumers.

Meanwhile, one casualty of the CPI basket is hand hygiene gel, a product that famously became incredibly popular during the Covid-19 pandemic.

However, now that there’s less concern over hand sanitising, the ONS recorded a decrease in demand and shelf space in shops. As a result, this has been removed.

This chopping and changing ensures that the basket best represents broader consumer trends over time.

Your personal inflation rate could be different to the headline figures

The official inflation figures are certainly a good barometer for how prices are moving year-on-year. However, it’s worth noting this rate does not necessarily mean that your individual cost of living is rising.

That’s because you aren’t necessarily buying all the goods in the CPI basket every year, let alone every month.

As well as food, energy, and housing, the basket also includes certain everyday items that you might only purchase perhaps every five years or even once a decade. This includes goods such as:

• Fridge/freezers
• Vacuum cleaners
• Gas fires
• Laptops

Indeed, how many caravans or boats have you purchased in the last 12 months? The prices of these goods are included in the basket, even though few people will buy one at all, let alone in the last year.

All this to say, although the inflation figures are an indicator of the direction of travel, they might not necessarily tell you how your spending power has changed. For that, you need to calculate your personal inflation rate.

There are various calculators available online that can help you work out your own personal rate of inflation.

Or, you could do so by creating a list or spreadsheet of your expenditure and tracking it over time. For example, you could use the ONS categories to calculate your expenses, including food, housing, bills, fuel, recreation and entertainment, and any other purchases you have made. Only include regular expenses, rather than one-off costs.

Then, you could look back historically and see how your spending has changed from one year to the next. If you keep this information updated in one place, you can also track what you spend from one month or year to the next, giving you an accurate picture of your individual inflation rate over time.

With this information to hand, you can then see how closely you match the official CPI inflation rate, and whether you need to make any changes to inflation-proof your wealth.

Get in touch

If you’d like support managing your wealth so you can ensure that your money will retain its spending power, then please do get in touch with us at Douglas White Financial Planning.

Email info@douglaswhiteltd.com or call 0151 345 6828 today to find out what we can do for you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.