Consumer price inflation basket of goods and services: 2021

• The basket of goods and services used to calculate the UK consumer price inflation indices has been updated.
• In 2021, 17 items have been added to the Consumer Prices Index including owner occupiers’ housing costs (CPIH) basket and 10 items have been removed.
• Additions to the baskets for 2021 include electric and hybrid cars, hand hygiene gel, men’s loungewear bottoms and smartwatches.
• Removals from the baskets include staff restaurant sandwiches and gold chains.

Introduction

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 2021, 17 items have been added to the Consumer Prices Index including owner occupiers’ housing costs (CPIH) basket and 10 items have been removed.

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 2021 are summarised in Annexes A and B, and the main changes from the 2020 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.

Consumer Prices Index (CPI)

A measure produced to international standards. 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 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 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.

The UK Statistics Authority recommended in 2019 that the publication of the RPI should be stopped at a point in the future and that in the interim, the shortcomings of the RPI should be addressed by introducing CPIH data sources and methods into its production. The Authority and HM Treasury subsequently launched a consultation (PDF, 531KB) on the Authority’s proposal to address the shortcomings of the RPI.

The response to the consultation was published on 25 November 2020. In summary, the Authority concluded that to make the change, it would follow the methodology outlined in the consultation document. In addition, it would discontinue the supplementary and lower level indices of the RPI when the proposals are implemented, providing users with guidance to assist moving away from RPI-related indices. The Chancellor decided that, to minimise the impact of the Authority’s proposal on the holders of index-linked gilts, he could not give his consent to implementing the changes before 2030 when the last of the relevant index-linked gilts matures.

This article also summarises one other change relating to the updating of weights for 2021 as a result of the coronavirus (COVID-19) pandemic. This is described in Section 4, with links to more detailed articles on the subject.

The shopping basket

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 order to compile the indices, covering over 720 representative consumer goods and services. These prices are collected in around 140 locations across the UK, from the internet and over the phone. During the coronavirus (COVID-19) lockdowns, all prices have been collected by phone and internet. 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. This could be because of 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. 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, 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.

Representative items

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 because of 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 representative items. Instead, selection is based on research into the various possible items that could be used, both using market research data and through investigation in outlets across the country.

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 whose prices are used to calculate an overall estimate of price change for all furniture products. These range from beds to kitchen units.

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 are updated each year so that the indices reflect current spending patterns. The weights for the CPIH and Consumer Prices Index (CPI) classes and higher-level aggregates are updated with effect from the January index and, since 2017, again with the February index. This improvement to the procedure in 2017 was the result of an independent report; it brought the procedure into line with best practice and helped 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. The Retail Prices Index (RPI) section weights and the distribution of weights for the more detailed individual item indices within each class or section are also revised each February. A more detailed article on changes to the published consumer price indices weights for 2021 was published on 15 March 2021.

Selecting the representative items

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 few. 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. 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 2021.

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 baskets.

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 the 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 representative items remain unchanged in 2021. In total, 17 items have been added to the CPIH basket and 10 items have been removed. Also, a small number of items have been modified in a total of 729 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

Timing of changes

Changes to the baskets of goods and services this year are being introduced with the February 2021 consumer price inflation statistics published on 24 March 2021. The baskets will be updated again at the same time next year.

Additions

New additions to the baskets in 2021 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 2021 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. All of the changes made this year affect all of the consumer price indices.

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, hybrid and electric cars have been added reflecting increased purchases of this type of vehicle and anticipating the longer-term phasing out of petrol and diesel cars. In November 2020, the government announced that sales of new petrol and diesel cars would end in the UK by 2030. They also announced that the longer-term future of the different types of hybrid would be the subject of consultation. The outcome of that consultation could result in further changes to the basket in future years.

Hand hygiene gel and men’s loungewear bottoms have also been added. Hand hygiene gel expands coverage of the personal healthcare area while the loungewear item reflects the continuing move towards more casual clothing. The introduction of both items has been influenced by the effects of the coronavirus (COVID-19) pandemic, with the increased use of portable hand cleansers by people on the move and more people dressing casually when working at home. The part of the basket covering womenswear already includes a slightly wider selection of clothing ranging from nightwear through to casual outdoor clothing, so loungewear has only been added as a men’s item at this stage.

The addition of hand weights, such as dumbbells, for home exercise has also been influenced by the effects of the coronavirus pandemic. Other items that have become part of everyday life during the pandemic were considered, most notably face masks. A decision was taken not to include these on the basis that consumer spending and usage could decrease rapidly once the population have been vaccinated so there could be problems in collecting prices towards the end of 2021.

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, frozen pre-prepared vegetables have been added to expand the range of frozen vegetables beyond frozen peas and increase the amount of pre-prepared food in the basket. Couscous has been added to help aid interpretation of data in the Consumer Prices Index including owner occupiers’ housing costs (CPIH) subclass for pasta products and couscous. Its introduction reduces the weight of other items, notably a dried potted snack, whose prices tend to move sharply in the short-term because of promotional activity by retailers. Other items added to diversify the range of existing products within specific categories include a women’s sweatshirt and a jumper or sweatshirt for older boys.

As in most years, developments in technology influence the basket update and for 2021, a smartwatch and smart lightbulb have been added to represent the advancements in and growing popularity of smart technology both in and out of the home. The smartwatch has been added to represent wearable tech while the light bulb is the most frequently available piece of smart technology for the home after a smart speaker, which is already in the basket. The addition of these items, along with the smart speaker, helps to ensure that the baskets remain representative of the latest technology that consumers are purchasing.

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 telephone and communications part of the basket. The inclusion of the smartwatch has helped to achieve that. The aim of rebalancing the baskets can also apply within specific categories and, this year, the mix of chocolate and confectionery has been changed slightly to improve brand representation.

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 the market. For example, the healthy eating trend has seen an increase in products where vegetable juices are either combined with fruit juices in smoothies or form the base for smoothies in their own right. As a result, the pure fruit smoothie previously in the basket is being replaced by a smoothie based on either fruit, vegetable or a combination of the two.

A further example is the replacement of some items of children’s clothing to anticipate an update to the international classification system (Classification of Individual Consumption by Purpose or COICOP) used to subdivide the Consumer Prices Index (CPI) and CPIH baskets into product and service groupings for analysis. A jumper or sweatshirt and a pair of trousers for a child aged between 18 months and 4 years are being replaced by the same items for an under 2-years-old-aged infant. The new items better match the terminology and age boundaries of the new classification.

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, lamb shoulder, with or without bone, has replaced lamb shoulder with bone. Here, the number of price quotes collected each month has been falling, with reduced availability in shops particularly in the early part of the week. The aim of widening the definition of the new item is to achieve more consistent pricing over time and better coverage than previously. The change in the chocolate confectionery items has also been driven largely by collection issues.

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 2021 to make space for the new additions.

In some cases this reflects low or decreasing expenditure, and resulting falls in stock levels for pricing, such as with Axminister or Wilton carpets. This item has been dropped from the baskets as research and anecdotal evidence from retailers has indicated that this type of carpet is used mainly in commercial premises now. The loss of one of the industry’s main manufacturers has also affected availability and coverage (that is, the number of price quotes collected each month) has fallen.

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, this year, fruit smoothies have been replaced by fruit and vegetable smoothies where research in the field has shown an increase in mixed fruit and vegetable juice products on the shelves leading us to introduce this more widely defined item.

In some cases, a product will remain represented in the baskets. For example, women’s casual trousers were previously represented by two items but one has been removed to allow space for other fashion clothing to be added. Price movements for women’s casual trousers are adequately represented by the remaining women’s casual trousers item.

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, items are generally chosen that have relatively low index weights, that are variants of others or have a relatively low number of price quotes. This year, a gold chain has been removed from the jewellery, clocks and watches part of the basket. Research shows that price movements for the gold chain tend to mirror those for the retained solid gold ring item. Additionally, a staff restaurant sandwich has been taken out from the canteens sector with the market seemingly moving more towards externally purchased food.

Collection issues can influence changes and, as already mentioned, a home-killed lamb shoulder with bone has been dropped because of lack of availability particularly in the early part of the week when price collection takes place.

Each year, the weights used in compiling the indices are updated alongside the contents of the baskets. For the Consumer Prices Index including owner occupiers’ housing costs (CPIH) and Consumer Prices Index (CPI), the 2021 weights would normally be based on spending patterns for 2019 from the national accounts. Given the effect of the coronavirus (COVID-19) pandemic on spending during 2020 under lockdown conditions, we have changed the procedures for 2021.

In line with international guidance (PDF, 503KB), we have decided to update the weights and basket, and to adjust the weights where there has been a clear change in spending between 2019 and 2020. The procedure for updating the basket contents is unchanged but the coronavirus pandemic has influenced some of the changes made.

For the Retail Prices Index (RPI), the 2021 weights would normally be based on spending patterns for the 12 months ending June 2020 from our Living Costs and Food Survey. Since this includes a period when spending was affected by the coronavirus pandemic, we have decided to use the results from the survey without further adjustment for changed spending patterns.

In January 2021, we published the Coronavirus (COVID-19) and Consumer Price Inflation weights and prices: 2021 article describing the change to procedures in full detail. Consumer Price Inflation, Updating Weights 2021, describing the numerical changes to the weights, was published on 15 March 2021.