Consumer price inflation basket of goods and services: 2019

The “shopping baskets” of items used in compiling the various measures of UK 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 2019, 16 items have been added to the Consumer Prices Index including owner occupiers’ housing costs (CPIH) and Consumer Prices Index (CPI) baskets, 10 items have been removed and 16 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 2019 are summarised in Annexes A and B, and the main changes from the 2018 price collection are discussed in this article. Similar articles have been published in previous years.

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

CPIH

The most comprehensive measure of consumer price inflation, which extends the CPI to include owner occupiers’ housing costs (OOH) and Council Tax. Aside from these two components, CPIH is identical to CPI.

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 for the Bank of England’s inflation target.

Retail Prices Index (RPI)

A legacy measure that we continue to publish in accordance with the Statistics and Registration Service Act 2007 and because of its use in long-term contracts and index-linked gilts. 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 a National Statistic. Shortcomings of the Retail Prices Index as a measure of inflation describes the issues with the RPI.

This article also summarises one other methodological change this is to the “weight updating” procedure for CPIH and CPI, and follows on from the introduction of an extra level of detail in March 2017. This is described in Section 6, Other change, with links to more detailed articles on the subject.

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 collected 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, from the internet and over the phone. In addition, around 300,000 quotes are used in measuring owner occupiers’ housing costs each month. This measure is based principally on data from administrative sources.

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.

Although kept constant within year, 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 whose prices have risen relatively rapidly to goods and services whose prices have fallen. As an 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, with the main increase in the years to 2003. 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, while price changes between January and February, and beyond, are based on the new basket. This procedure ensures that the annual changes to the basket do not introduce a discontinuity in prices as measured by the indices.

Consumer price indices, a brief guide: 2017 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 Consumer Prices Index including owner occupiers’ housing costs (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 supply. However, it would be impractical 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 due to the significant difficulties involved in defining an adequate sampling frame, that is, a list of all the individual goods and services bought by households. This restricts 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 Consumer Prices Index including owner occupiers’ housing costs (CPIH) “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 shopping basket 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 spending on all garden tools.

These expenditure weights were historically updated annually so that the indices reflected current spending patterns. The weights for CPIH and the Consumer Prices Index (CPI) classes and higher-level aggregates were updated with effect from the January index while Retail Prices Index (RPI) section weights were revised with effect from the February index. The distribution of weights for the more detailed individual item indices within each class or section were also revised each February.

However, from 2017, CPIH and CPI subclass and higher-level aggregate weights have been updated additionally with the February index. This improvement was the result of an independent report; it brings the procedure into line with best practice and helps to better meet EU regulations. Assessing the impact of methodological improvements on the Consumer Prices Index, published on 18 October 2016, describes this change in more detail and analyses the impact. 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 2019 will be published on 18 March 2019.

A number of factors need to be taken into account when choosing representative items. Of course, the items must be easy to find by the team of people collecting the price quotes, so ensuring that estimates of price change are based on an adequate number of 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 clothing and garden items is clearly seasonal and so these goods require a slightly different treatment in the indices. For example, prices of patio furniture are only collected during the summer months when the item is mostly found in shops. In winter months, their index is constructed based on the prices of other items in the furniture section of the basket.

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 the Consumer Prices Index including owner occupiers’ housing costs (CPIH) in Table 1, and the balance used as a reference point 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 that might benefit most from improved coverage, for example, where the current allocation of items is broadly comparable with index weight but variation in price changes appears relatively high, possibly reflecting the diversity of goods and services covered. As discussed later in this article, this type of analysis has motivated some of the additions to the baskets in 2019.

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 Office for National Statistics (ONS) 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 to ONS by the price collectors. Together, these various sources of information help to ensure that the goods and services bought by the average household 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 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 2019. In total, 16 items have been added to the CPIH basket, 10 items have been removed and 16 items have been modified in a total of 720 items. The modifications usually relate to the type of shop where items are priced.

In summary, selection of representative items is based on several 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 Consumer Prices Index (CPI) where estimated consumers’ expenditure is one part per thousand or more of all expenditure covered by the CPI. Based on household final consumption data underpinning the calculation of the 2019 CPI weights, this is around £1,000 million.

Changes to the baskets of goods and services this year are being introduced with the February 2019 consumer price inflation statistics published on 20 March 2019. The baskets will be updated again at the same time next year.

Additions

New additions to the baskets in 2019 and those items removed are set out in Tables 2 and 3, together with a 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 2019 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. The exception is a unit trust managers’ initial charge item, which has been removed from the Consumer Prices Index including owner occupiers’ housing costs (CPIH) and the Consumer Prices Index (CPI) but was never included in the Retail Prices Index (RPI).

As in most years, developments in technology influence the basket update and for 2019, a smart speaker, such as the Amazon Echo or Google Home, has been added. This type of equipment has not been covered previously and it ensures the baskets remain representative of the latest technology items that consumers are purchasing.

Aside from new technology, 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, bakeware has been added reflecting increased expenditure in recent years possibly influenced by the success of various television cookery programmes. Similarly, flavoured teas have been introduced due to their increased popularity shown by the shelf-space devoted to them in stores.

In addition to introducing items to represent distinct sectors or markets, some items have been added to diversify the range of products collected for already established groupings, usually where spending is significant. For example, peanut butter has been introduced to improve coverage of oils and fats. Previously, margarine was the only item in the relevant subclass and its prices tend to be reasonably volatile so the inclusion of peanut butter should help interpretation of the figures. Similarly, an electric toothbrush has been added to improve representation of electrical appliances in the personal care class.

Analysis of the broad balance of the existing sample of representative items across CPIH highlighted a need to improve coverage of price changes in the books class so children’s fiction suitable for 6 to 12 years of age has been added. This closes a gap in the coverage of books between illustrated books for infants and teenage literature. This item has been introduced principally as part of the rebalancing of the baskets to improve their representation of overall price change, with other factors such as increased spending or product history only a secondary consideration used in selecting the specific product.

In other cases, new items are direct replacements for similar products with the change made for a variety of reasons. One of these is a change in consumers’ buying habits. For example, lounge furniture is increasingly bought as a combination of single items, such as corner units or settees and not in the traditional three-piece suite format. This might partly reflect the various styles of modern housing. As a result, non-leather settees have replaced three-piece non-leather suites in the baskets. Similarly, dinner plates have replaced crockery sets with more people buying crockery items individually than as part of traditional sets.

Other replacements reflect changes in spending patterns. For example, dog treats have been added in place of dry dog food as the balance of spending has shifted between the two. Likewise, washing liquid or gel has been brought in to replace washing powder.

A final type of replacement is where price collection difficulties suggest a change would improve the coverage and quality of price series in specific areas of the baskets. This year, wheel alignment has replaced brake fitting in fast fit centres. Research has found that the new item would be easier for collectors to price and would result in more consistent pricing and better coverage than the old.

In addition to reviewing the specific items in the baskets, the annual update considers the types of shops or places where prices are collected. Popcorn bought at the cinema is already included in the catering services part of the baskets but a new popcorn item has been added, which is priced in shops. Popcorn has attracted increased spending over recent years and its inclusion as a shop-bought item widens the range of products in the bread and cereals class, in particular improving the coverage of snack items. More generally, some items have been added to the price collections in some supermarkets while others have been removed from the collections in other supermarkets, reflecting changes in the product range of these retailers. For example, some items of children’s clothing have been added to collections.

Finally, the seasonality of items within the baskets is also reviewed. Previously, prices for packets of seeds were collected only in the first half of the year but from 2019, prices will be collected through to the autumn.

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 2019 to make space for the new additions.

In some cases, this reflects low or decreasing expenditure, such as with the initial charges made by unit trusts to cover start-up costs as many managers no longer apply an initial charge. Although not necessarily decreasing in spend, washing powder and complete dry dog food have been replaced by items that attract larger expenditure, namely washing liquid or gel and dog treats respectively.

Some items have been removed to make way for new additions to the baskets within the same product grouping. This year, the three-piece non-leather suite of furniture and crockery set have been replaced by a non-leather settee and dinner plates respectively. As already described, this reflects changes in consumer buying patterns.

In some cases, a product will remain represented in the baskets even if there is no longer an explicit item. For example, the initial charges made by unit trusts to cover start-up costs mentioned previously have been removed but unit trust fees continue to be represented by the ongoing charges made by managers.

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 items that are variants of others have typically been chosen. This year, envelopes have been removed from the miscellaneous printed matter and stationery part of the baskets, in part reflecting the increasing use of new technology for communication. Additionally, a soft drink has been taken out from the canteens section. Many of the prices collected for this item represent vending machine sales, which are covered in a separate item.

Collection issues can influence changes and, as already mentioned, brake fitting at fast fit auto centres has been removed. It has been replaced by wheel alignment, which is easier to price consistently over time and which identifies the service element more clearly, being less dependent on price changes in the parts used.

One other change has already been introduced with the publication of the January index on 13 February 2019. This relates to the calculation of the higher-level weights in the Consumer Prices Index including owner occupiers’ housing costs (CPIH) and the Consumer Prices Index (CPI).

The change follows on from the introduction in 2017 of an additional “subclass” level of detail in the analysis of these indices, described in Assessing the impact of methodological improvements on the Consumer Prices Index. Essentially, updating the CPIH and CPI higher-level weights involves updating the expenditure used and price-adjusting this expenditure so that it reflects the most recent prices available when the weights are produced. For example, the weights used in compiling the January 2019 indices were based on 2017 expenditure information updated to represent December 2018 prices. More detail on this process is given in Consumer price inflation, updating weights: 2018. From the January 2019 index, the price series used to price-update expenditure has changed to the subclass level of detail first introduced in 2017. Analysis of the change suggests its impact would not be significant at any level of CPIH or CPI.