Consumer price inflation basket of goods and services: 2017

The “shopping baskets” of items used in compiling the various measures of consumer price inflation are reviewed each year. Some items are taken out of the baskets and some are brought in to make sure the measures are up to date and representative of consumer spending patterns. In 2017, 16 items have been added to the CPIH basket, 11 items have been removed and 8 have been modified.

This article describes the review process and explains how and why the various items in the consumer price inflation baskets are chosen. The contents of the baskets for 2017 are summarised in Annexes A and B, and the main changes from the 2016 price collection are discussed below. Similar articles have been published in previous years.

The following are the main measures of consumer price inflation covered in the article.

CPIH

A measure of consumer price inflation that includes owner occupiers’ housing costs (OOH) and council tax. From 21 March 2017 the commentary on CPIH will be expanded and put first in the Consumer Price Inflation statistical bulletin. CPIH is not currently a National Statistic and it has been reassessed by the Office for Statistics Regulation (OSR) against the standards set out in the Code of Practice for Official Statistics. The assessment report published on 3 March 2016 included a number of requirements that need to be implemented for CPIH to regain its status as a National Statistic and we are working to address these.

Consumer Prices Index (CPI)

A measure produced to international standards and in line with European regulations. First published in 1997 as the Harmonised Index of Consumer Prices (HICP), the CPI is the inflation measure used in the Government’s target for inflation.

Retail Prices Index (RPI)

A legacy measure that we continue to publish because of its use in long-term contracts and index-linked gilts. In accordance with the Statistics and Registration Service Act 2007, the Retail Prices Index and its derivatives were assessed against the Code of Practice for Official Statistics in 2013 and found not to meet the required standard for designation as National Statistics. The full assessment report can be found on the UK Statistics Authority website.

This article also summarises other methodological changes relating, for example, to the coverage of CPIH, the level of detail published and the aggregation methods used in CPIH and CPI. These are described in the ”Other changes” section.

Consumer price inflation is the rate at which the prices of goods and services bought by households rise or fall. A convenient way of thinking about this is to imagine a very large “shopping basket” containing those goods and services bought by households. As the prices of the various items in the basket change over time, so does the total cost of the basket. Movements in consumer price inflation indices represent the changing cost of the shopping basket.

In principle, the basket should contain all consumer goods and services purchased by households and the prices measured in every shop or outlet that supplies them. In practice, the consumer price indices are calculated by collecting a sample of prices for a selection of representative goods and services in a range of UK retail locations including the internet. Currently, around 180,000 separate price quotations are used every month in compiling the indices, covering around 700 representative consumer goods and services. These prices are collected in around 140 locations across the UK and from the internet and over the phone at ONS.

Within each year, the consumer price indices represent the changing cost of a basket of goods and services of fixed composition, quantity and quality. In practice, this is achieved by:

• keeping the sample of representative goods and services constant
• applying a fixed set of weights to price changes for each of the items such that their influence on the overall index reflects their importance in the typical household budget
• taking care to ensure that replacements for brands that are no longer stocked in an individual shop are of comparable quality

In this way, changes in the consumer price indices from month to month reflect only changes in prices, and not ongoing variations in the quality and quantity of items purchased by consumers.

However, the contents of the consumer price inflation basket of goods and services and their associated expenditure weights are updated annually. This is important in helping to avoid potential biases that might otherwise develop over time, for example, due to the development of entirely new goods and services, or the tendency for consumers to move away from buying goods and services which have risen relatively rapidly in price and to goods and services whose prices have fallen. For example, if the price of tea rose dramatically during one year, consumers might switch their spending towards coffee making it necessary to adjust the expenditure weights accordingly in the following year.

These procedures also help to ensure that the indices reflect longer-term trends in consumer spending patterns. For example, the proportion of household expenditure devoted to services has broadly risen overall over the last 25 years. This is reflected both in an increasing weight for this component in the consumer price indices, and the addition of new items in the basket to improve measurement of price changes in this area: examples include playgroup and nanny fees.

Changes to the items and their associated item weights are introduced in the February index each year, but prices are collected for both old and new items in January. This means that the figures for each year can be “chain linked” together to form a long-run price index spanning many years. In other words, price changes between December and January are based on the old basket and weights, and price changes between January and February, and beyond, are based on the new basket and weights. This procedure ensures that the annual changes to the basket and weights do not introduce a discontinuity in prices as measured by the indices. More information on chain-linking and changes to the current procedure are summarised in the “Other changes” section of this article.

Consumer Price Indices: A brief guide: 2016 provides a helpful introduction to the concepts and procedures underpinning the compilation of the consumer price indices. These are described in much greater detail in Consumer Price Indices – Technical Manual and CPIH Compendium.

In reality the CPIH and Consumer Prices Index (CPI) inflation baskets differ because CPIH includes a measure of owner occupiers’ housing costs and council tax that are excluded from CPI. Both the CPIH and CPI baskets contain some items excluded from the Retail Prices Index (RPI) basket such as university accommodation fees and unit trust commissions. Similarly, the RPI basket contains some items (for example, estate agent fees) that are excluded from the CPIH and CPI baskets. The precise weights attached to the individual items also differ. The differences between the inflation measures are discussed in Users and uses of Consumer Price Inflation Statistics.

There are some individual goods and services where typical household spending is so large that they merit inclusion in the baskets in their own right: examples include petrol, and electricity and gas supply. However, it would be both impractical and unnecessary to measure price changes of every item bought by every household in compiling the consumer price indices.

More commonly, a sample of specific goods and services has to be selected that gives a reliable measure of price movements for a broader range of similar items. For example, price changes for garden spades might be considered representative of price changes for other garden tools. The selection of these representative items is judgmental since the significant difficulties involved in defining an adequate sampling frame (that is, a list of all the individual goods and services bought by households) restrict the use of traditional random sampling methods when choosing the representative items.

For each product grouping, a number of items are selected whose price movements, when taken together, provide a good estimate of the overall change in prices for the group. For example, there are around 20 representative items in the CPIH and Consumer Prices Index (CPI) “furniture and furnishings” class, from beds to kitchen units, whose prices are used to calculate an overall estimate of price change for all furniture products.

The prices collected for each product group are then combined to produce the overall consumer price indices, with weights proportional to total expenditure on the entire product group. So the weight given to “furniture and furnishings” in the CPIH and CPI shopping baskets reflects average household spending on all furniture products as opposed to spending on the basket items only. Similarly, the weight of garden spades would be derived from all spending on garden tools.

These expenditure weights have historically been updated annually so that the indices reflect current spending patterns. In line with usual practice, the CPIH and CPI class weights were updated with effect from the January 2017 index and the Retail Prices Index (RPI) section weights will be revised with effect from the February index, at which point the weights for the more detailed item indices will also be revised. However, from 2017, the CPIH and CPI class weights will be updated additionally with the February index. More information on this is included in the “Other Changes” section. Broadly speaking, over the longer term, weights for services have increased while those for goods have decreased. A more detailed article on changes to the published consumer price indices weights for 2017 will be published on our website on 20 March 2017.

A number of factors need to be taken into account when choosing representative items. Of course, the items must be easy to find by price collectors, so ensuring that estimates of price change are based on an adequate number of price quotes collected throughout the UK. Since the consumer price inflation statistics are based on the cost of fixed in-year baskets of goods and services, ideally they should also be available for purchase throughout the year. However, availability of some food and clothing items is clearly seasonal, and so these goods require a slightly different treatment in the indices.

The number of items chosen to represent each product group within the indices depends both on the weight (that is, expenditure) of the group and also the variability of price changes between the various items that could be selected to represent the group (reflecting, for example, the diversity of products available). Intuitively, it makes sense to choose more items in product groups where spending is high. This helps to minimise sampling variability in the estimate of price change for high-weighted groups, and therefore in the overall price index. However, if price movements of all possible items in the group are very similar, it is sufficient to collect prices for only a few¹. In contrast, if price movements of all the possible items are very different, prices will be needed for many representative items to get a reliable overall estimate of price change for the group.

Based on this, the allocation of items to broad commodity groups can be analysed, as shown for the 12 divisions of CPIH in Table 1, and the balance used as an anchor for the annual review of the baskets. The significant allocation of items to the food division relative to its index weight, for example, is partly explained by the relatively high variation in observed price changes between the individual goods in this area. Conversely, a smaller proportion of items relative to index weight is allocated to the restaurants and hotels division, reflecting greater similarity in observed price changes. In some cases, such as transport and housing, apparent low allocations of items are explained by the presence of some dominant individual items (for example, car purchase and motor fuels, and owner occupiers’ housing costs and housing rents respectively). Here, the case for adding further items to improve coverage of these divisions’ remaining index weights is much weaker. Instead, it is far more important to ensure that the sampling of prices for these heavily weighted items is as comprehensive as possible.

The analysis also helps to highlight those areas of CPIH which might benefit most from improved coverage, for example, where the current allocation of items is broadly comparable to index weight but variation in price changes appears relatively high, possibly reflecting the diversity of goods and services covered. As discussed later, this type of analysis has motivated some of the additions to the baskets in 2017. Conversely, it also helps to highlight areas where there is scope to remove items from the baskets without any significant loss of precision in the indices. It is important that growth in the overall size of the baskets is limited each year so that production costs and processing times are contained.

Such analysis cannot tell us which items should be priced, and so choosing a particular set of items to represent each area remains a matter of judgement. Consumer price inflation commodity groupings are regularly reviewed with the aim that all significant items or distinct markets where consumers’ expenditure exceeds around £400 million annually are explicitly represented in the baskets, except where those items are judged to be adequately represented by other items in the baskets². Conversely, where spending on items falls below the £100 million mark, there should be good reason for their continuing inclusion in the baskets. For example, while spending on acoustic guitars and power drills is relatively low, both are included in the baskets to represent wider markets (musical instruments and electrical tools respectively) that would otherwise not be covered explicitly. Trends in expenditure, as well as the latest available figures, help to inform the decisions in all cases.

This focus on expenditures in determining the contents of the baskets partly reflects the data that are available describing household spending patterns. One major source of information comes from the diaries and questionnaires filled in by people taking part in the Living Costs and Food Survey, a continuous survey of around 5,000 households each year. This is supplemented by detailed analyses of trends presented by market research companies, trade journals and in press reports. Changes in the retail environment are also reported back by the price collectors, and together these various sources of information help to ensure that the goods and services that the average household spends its money on are appropriately represented in the inflation baskets.

It is very important to note that the contents of the baskets and, in particular, changes from one year to the next should not be given significance beyond their purpose as representative items used in estimating consumer price changes. Changes to the baskets will reflect evolving consumer tastes but only over a long run of years. In any particular year, changes to the baskets will reflect a range of considerations such as practical experience in collecting prices, the desire to improve coverage in high spending areas, or analysis that suggests that estimated price changes could be improved at the margin by varying the number or type of representative items collected. Indeed, within each product grouping there is usually a point at which the exact number and choice of items and the precise weights attached to them become a matter of relatively fine judgement. At this detailed level, it is unlikely that such choices would have any significant impact on the consumer price indices. For example, a selection of specific household appliances has been chosen to represent spending on small electrical goods, including irons and kettles. However, other representations would clearly be possible and equally valid.

It should also be noted that the vast majority of the around 700 representative items remain unchanged in 2017. In total, 16 items have been added to the CPIH basket, 11 items have been removed and 8 items have been modified in a total of 713 items. The modifications usually relate to where items are priced and how many quotes are collected.

In summary, selection of representative items is based on a number of factors, including:

• ease of finding and pricing the product
• availability throughout the year
• amount spent on a particular item or the group of items
• variability of prices within a class
• analysis of balance across the basket

Notes for Selecting the representative items:

1. At the extreme, if price changes for all the possible items that could be selected in a particular group were identical each month, it would be necessary to select only one of the items for inclusion in the basket. Price changes for this one item would be perfectly representative of price changes for the group as a whole.

2. Under European regulations, items should be included in the CPI where estimated consumers’ expenditure is 1 part per thousand or more of all expenditure covered by the CPI. Based on household final consumption data underpinning the calculation of the 2017 CPI weights, this is approaching £900 million.

Changes to the baskets of goods and services this year are being introduced with the February 2017 consumer price inflation statistics published on 21 March 2017. The baskets will be updated again around the same time next year.

Additions

New additions to the baskets in 2017 and those items removed are set out in Tables 2 and 3, together with a brief summary of the motivation for these changes. As the tables make clear, these motivations are diverse. As in previous years, changes to the baskets in 2017 certainly should not be viewed as a simple indicator of those products or services whose popularity has either grown or fallen significantly over the past year. Most of the changes made this year affect all of the consumer price indices but 2 items have been added to CPIH which were already in the Retail Prices Index (RPI). These are council tax bills in Great Britain and rates in Northern Ireland. Historically they were excluded from the Consumer Prices Index (CPI) since they were considered to be direct taxes and outside its scope based on the European regulations which underpin that index. However, they are an important cost associated with the use of a dwelling and, following an open consultation of users, they are being included in CPIH.

A number of new items have been introduced to represent specific markets where consumer spending is significant or growing and existing items in the baskets may not adequately represent price changes for such goods. For example, non-dairy milk drinks have been added reflecting the distinct and growing market for “Free From” foods. The item is intended to capture price movements for milk-type drinks based on, for example, soya or almond. Similarly expenditure on flavoured water has been rising and the product has now been added to the mineral waters, soft drinks and juices part of the baskets.

In addition to introducing items to represent distinct sectors or markets, a number of items have been introduced to diversify the range of products collected for established groupings, usually where spending is significant. For example, gin has been added as expenditure has risen following a reported increase in the number of small distilleries over recent years. Its inclusion will help interpretation of the spirits section of the baskets where there is a high degree of price volatility due to periodic discounting. Half chocolate-coated biscuits and cough liquid have been included simply to expand our coverage of biscuits and pharmacy products respectively.

Analysis of the broad balance of the existing sample of representative items across CPIH and CPI highlighted a need to improve coverage of price changes for a number of classes. These areas include:

• other clothing and clothing accessories (3.1.3), where a cycle helmet has been added in part reflecting the growing popularity of cycling

• games, toys and hobbies (9.3.1), with a jigsaw introduced in particular to represent an adult-type hobby

• garments (3.1.2), with the addition of a base layer top, a type of clothing not currently covered but widely purchased

In each of these cases, the item has been added principally as part of the rebalancing of the baskets to improve their representation of overall price change with increased spending or product history only a secondary consideration used in selecting the specific product.

In other cases, the new items are direct replacements for similar products that leave the baskets in 2017. For example, off sales of bottled apple cider have been replaced by two items: canned apple cider and bottled flavoured cider. This reflects the emergence of flavoured cider over recent years and widens coverage to both traditional and new variants, and both bottles and cans. A second example is the introduction of a child’s scooter to replace a child’s swing. The number of price quotes collected for the swing has been falling reflecting its availability in shops particularly in the winter months and the change is an attempt to improve coverage of outdoor play equipment particularly in those winter months. This year, the confectionery and cigarette items have been reviewed as part of the ongoing updating of the baskets and in both cases there have been changes to the branded products priced each month. The changes reflect market share and an attempt to widen coverage across manufacturers.

It is important that the review of the baskets considers not just the list of items to be priced, but also where the prices are collected. Various household textiles, such as duvet covers and bath sheets, have been added to the price collections in major supermarkets reflecting the increased product range in these shops. Similarly certain toys (such as model vehicles and craft kits) which were already priced in some supermarkets have been added to the list of products collected in others.

As always, specific product descriptions are reviewed each year and updated as appropriate. One example this year is the dining table and chairs. These were already in the baskets but its composition and number of chairs has been widened so that for example kitchen tables and chairs can be priced, reflecting the rise in informal dining.

Removals

As noted earlier, it is important that growth in the overall size of the baskets is limited each year so that production costs and processing times may be contained. A number of items therefore have been removed from the baskets in 2017 to make space for the new additions. In some cases, this reflects low or decreasing expenditure, such as that on basic mobile phone handsets as people increasingly move towards smartphones and the number of models available in shops falls. It can also reflect anticipated market changes: for example, mentholated cigarettes (and others with distinguishable flavours) being banned from 2020. In other cases, removal does not necessarily imply that the markets for these goods and services are very small or are declining significantly.

Some items have been removed to make way for new additions to the baskets within the same product grouping. For example, off sales of spirit based drinks have been replaced by gin which has been attracting increased expenditure.

In some cases a product will still remain represented in the baskets even if there is no longer an explicit item. For example, brake pads have been removed as a separate item from the local price collection conducted across the UK but they will continue to be priced as part of a smaller collection of “spare parts” prices conducted centrally over the internet. An apple cider on sales item has been replaced by a broader cider item which enables the collection of prices for pear and flavoured ciders.

Elsewhere, analysis suggested that there was scope to remove items from certain product groupings without any significant loss of precision in estimates of price changes overall. Within these groupings, those items with relatively low index weights or those items which are variants of others have typically been chosen: examples include fees for stopping a cheque and a single drainer sink. In each case, it is judged that price changes for these items remain adequately represented by others that remain in the baskets.

Finally, collection issues can influence changes to the baskets. This year, a child’s swing has been replaced by a scooter as the swing was increasingly difficult to find in shops particularly in the winter months.

A number of other changes are being introduced with the publication of the February index on 21 March 2017. Each of these is described in more detail in other articles but is summarised here.

CPIH

Following a statement by the National Statistician in November 2016, from 21 March 2017 we will expand the commentary on CPIH and put it first in the Consumer Price Inflation statistical bulletin. At that time, there is an opportunity to introduce improvements and revisions to the index to ensure that it is of the highest quality. The changes being made are a revision of the weights for imputed rents, which constitute the owner occupiers’ housing element of CPIH, and the inclusion of council tax. Impact of inclusion of council tax and revised imputed rents on CPIH, published on 13 December 2016, describes the background to the changes and presents an analysis of the estimated impact from them covering 2005 to 2015. An update of the analysis was subsequently published on 6 January 2017 which includes data up to September 2016.

COICOP5

An additional level of detail is being introduced in the Classification of Individual Consumption by Purpose (COICOP) used in aggregating and analysing CPIH and Consumer Prices Index (CPI). This new level is known as COICOP5 and sits between the existing class (or COICOP4) level and item level. For example, an index is currently published for oils and fats which is based on price indices for 4 items: spreadable butter, block butter, margarine and olive oil. From March, this class will additionally be broken down into 3 COICOP5 headings: butter (based on the price indices for spreadable butter and block butter), margarine and olive oil.

Updating of CPIH and CPI weights

As mentioned earlier in the “Representative items” section of this article, the weights for CPIH and CPI are updated twice each year with the January and February indices. Historically the weights for classes and higher level aggregates were updated with the January index and the distribution of weights for the individual items within each class was updated with the February index. In future the weights for classes and higher level aggregates will be updated for a second time each year with the February index. This will bring the index mathematically into line with a single chain-linked index. The improvement is the result of an independent report and will also help us to better meet EU regulations. Assessing the impact of methodological improvements on the Consumer Prices Index published in 18 October 2016 describes these changes in more detail and analyses the impact of them.