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Friday, July 16, 1999 Published at 13:35 GMT 14:35 UK


Business: The Economy

We're richer than we thought

There could be more money in your pocket than you realised

People in the UK might be better off than they think, according to a report from the Institute of Fiscal Studies.

It claims that the official measure for inflation has overstated the true cost of living in the past two decades.


BBC Economics Correspondent Chris Giles: Not good news for pensioners and unions
This would mean that pensions and many wage settlements linked to the rate of inflation have more than kept up with price changes.

Basket of goods

Inflation is calculated by tracking the prices of a so-called basket of goods over a period of time.

But the IFS, an independent think tank, believes consumers tend to change the goods they buy.

This, along with the emergence of new goods and the improved quality of existing products, could have led to the overstatement.

The report took the example of the national Lottery, which was launched nearly five years ago and now accounts for 1% of consumer expenditure.

It estimated that by including the lottery, the inflation figure excluding housing for the year to December 1994 would have fallen by at least 0.17% to 1.97%.

Audio-visual goods 60% cheaper

The study also argues that while the price of audio-visual equipment has fallen by about 20%, the quality has improved hugely.

That means that true price fell by at least 60% between 1974 and 1996, but the inflation index did not recognise this.

If this report were accepted, it could have dramatic consequences for the government, as it would not have to pay out so much in inflation-linked spending.





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