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Row over the national shopping basket

If you are what you buy, deciding who the average consumer is has never been more difficult.

The statistician's shopping basket includes everything from Eurotunnel fares to cable subscription, with the cost of a cinema ticket and the price of a beer chucked in.

In order to measure how much prices in the UK are rising, the Office for National Statistics (ONS) measures the prices of about 600 items on a monthly basis in 146 areas around Britain.

Choosing the items to monitor and how they should be weighted is done with the help of the Family Expenditure Survey, which establishes on what the typical household spends its money. When people spend significant amounts on something new, it is added to the basket of goods.

But critics claim this system could be creaking. The basket does not include relatively new items such as lottery tickets. So far, the ONS does not measure the prices of goods sold on the internet.

"At the moment, there isn't a question in the family spending survey about internet shopping," the ONS spokeswoman said.

This all adds up to claims that inflation, 1.2% in the year to October, could be overstated by as much as 0.5%.

Wired shopping

Most pundits agree that shopping on the web is set to increase, with many e-businesses offering cut-price deals to get their business off the ground.

If these companies also exist in bricks and mortar, their sales are likely to find their way into the retail sales index, an ONS spokeswoman said.

But when it comes to the retail price index, the items included are those that are accessible to an average family household.

"It may not be considered that an average household would shop on the web," the spokeswoman said. "If you walk down a street with 30 or 40 houses, maybe only six of them would shop on the web." But it is an issue the ONS is considering.

Many think that prices on the web, often cheaper than shop prices, should be included in the index.

"It is an issue to the extent that prices on the internet are different to prices on the High Street. They need to survey net prices and if they are different include them," a spokesman for the Institute for Fiscal Studies said. But it is estimated that it could take the ONS two years to compile this data.

The US Bureau of Labor Statistics does include goods sold on the internet in its price index. "The proportion of goods sold on the internet is relatively small compared with other outlets," a spokesman said.

He added that "over the long term, you wouldn't expect there to be much difference as other outlets (cut prices to compete)," he said.

Its all a lottery

The ONS basket last hit the headlines with news that the cardigan was once again to be included in the basket.

But some everyday purchases, such as National Lottery tickets, fail to make it to the index.

By the ONS's own reckoning, gambling counts for about 1% of personal weekly spending.

Gambling is not included, the ONS says, "because it is hard to measure the service being purchased or identify a 'unit' being priced."

Not as bad as it looks

But it is apparent anomalies such as these that prompt criticism of the ONS basket.

Some people argue that the ONS's measure could overstate inflation by as much as 0.5%.

"You try and measure inflation for millions of people over thousands of products, you will never get it spot on," Steven Bell at Deutsche Asset Management said.

But if the official figures do overstate the case, this could mean that pensions and wage settlement have more than kept up with price changes.

This view finds some support from the IFS.

The retail price index is slow to adjust for quality improvements in the goods sold and slow to introduce new goods, a report published by the IFS earlier this year found.

If this was recalculated, it would cut spending estimates, giving Chancellor of the Exchequer Gordon Brown more money to spend.

A question of devolution

The criticisms do not stop there.

As the UK devolves, there may even be calls for regional inflation data to provide an accurate picture of the regional economies.

In Germany, inflation data is provided state by state, while in the UK one national figure is provided.

The UK system stems from the days when the government wanted to encourage wage bargaining at a national level.

The ONS has said its sample sizes are too small for a regional breakdown, while the Bank of England focuses on one national inflation figure.

Relevant Stories

UK inflation creeps up (16 Nov 99 | The Economy)
We're richer than we thought (16 Jul 99 | The Economy)

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Institute for Fiscal Studies
Office for National Statistics

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