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What do we mean by cost of living?

19 July 2023

Confused about the cost of living and inflation? This article clarifies the concept while exploring varying price increases in different sectors, the distinction between CPI and RPI inflation measures, and the impact of interest rates on loan repayments. Helping you unravel the complexities of cost fluctuations and make informed financial decisions.

People frequently discuss the cost of living, but its meaning may not be clear. A simple dictionary definition of cost of living would probably say something like:

The level of prices relating to a range of everyday items…

The problem is, the price inflation for food, or fuel for your car, or heating costs will vary. Although inflation is quoted as just under 9% in the UK, this disguises the true rate of cost increases in different sectors. For example:

  • Petrol and diesel prices were much higher in 2022 that currently. In which case prices in this area have reduced.
  • In the year to May 2023, food and non-alcoholic beverages rose by 18.4%, much higher than the current rate of published inflation.
  • According to the Office of National Statistics energy prices rose 8.1% in the year to May 2023. However, energy price caps will have artificially held down price increase due to government interventions.

To further complicate the issue, inflation is measured in two ways:

  • CPI – the Consumer Price Index, and
  • RPI – the Retail Prices Index

The Retail Prices Index (RPI) is no longer classified as a National Statistic because the way it is calculated does not meet international standards.

In general terms, when the press discuss inflation, the measure they are quoting is the CPI. The CPI inflation rate in May 2023 was 8.7%, the same as in April 2023.

The other factor that is entering the equation on this topic is interest rates. The Bank of England only has one weapon in its armoury to bring down inflation and that is to increase interest rates to dampen demand.

As rates increase, the cost of repaying loans – particularly mortgages – is increasing. Stories abound of monthly repayments doubling in recent weeks.

And so, care should be taken when interpreting price increases. The CPI hides a wealth of price increases and decreases that are no where near 8.7%.

Source: Other Wed, 19 Jul 2023 00:00:00 +0100

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