UK Government is Still Underestimating Inflation According to Fool.co.uk's Inflation Index

By: Fool.co.uk

Despite two interest rate hikes this year to curb the cost of living, Fool.co.uk readers say official inflation figures are still wide of the mark (1).

• Consumers say the true rate of inflation is 7.3% not 2.5%
• Inflation is lower for men than women
• Older people are worst affected by inflation
• Scotland experiences the lowest rate of inflation
• Northern Ireland experiences the highest rate of inflation

As part of an ongoing study (2) into inflation in British households, almost 1,300 Fool.co.uk readers again disagree with official inflation numbers. They reveal the Government's measure of inflation bears little resemblance to what they feel is the real increase in the cost of living. Nine out of ten people say inflation is almost three times higher than the Government's figure of 2.5% (3).

On average, consumers think that prices are rising at 7.3%. Six months ago they said inflation was 7.4% and not 2.7% as calculated by the Office for National Statistics. Two out of three people estimate their personal inflation is somewhere between 4% and 9%, and one in five people believe that inflation is between 10% and 15%.

For a second time, men and women have distinct takes on inflation. Men say their personal inflation is 6.5%, which is appreciably lower than the 7.1% cited last time. Women reckon that the cost of living is rising at 7.6% a year. This is slightly lower than six months ago when they said inflation was 7.9%.

The Fool.co.uk inflation index also highlights the varying impact of inflation on different age groups. Young people are affected least, though people between 18 and 25 say inflation is now higher than six months ago. They put the rate of inflation at 6.9% compared to 5.9% in January.

However, it is older people who are worst affected by inflation. People between 42 and 49 reckon that inflation is 7.6%. Significantly, the oldest group in the survey says inflation is more likely to be 7.1%.

It seems that people living in Scotland are some of the least affected by rising prices. Personal inflation north of the border is 6.3%, down from 7.5% last time. But Scotland's triumph is Northern Ireland's loss. People in Northern Ireland say inflation is running at 8.1%, up from 7.7% in January. Londoners reckon inflation is stuck at 7.3%.

David Kuo, Head of Personal Finance at Fool.co.uk , says: "When gauging inflation, consumers simply want reliable inflation figures. Our indices show they are, and that raises questions as to the relevance of Government inflation numbers to ordinary people.

"Inflation is not whittling away our income at a modest 2.5% per annum as the Government suggests "it is slicing off chunks at a rate of 7.3% a year. For one in five people, the buying power of the pound in their pockets is being eroded at over twice this rate.

Older people, especially those who rely on retirement income, are some of the worst affected. Furthermore, people relying on the basic state pension, which will only rise in line with Government inflation figures, may feel the pinch even more.

Inflation is sometimes called the hidden risk because it quietly chips away at the buying power of the pound in our pockets. But it's hard to disguise a chip when it becomes a chunk.

Figure 1: What do you think is your personal rate of inflation based on your household expenditure results table

Region Personal Inflation
January 2007 June 2007

Scotland 7.5% 6.3%
Northern Ireland 7.7% 8.1%
Wales 7.6% 7.3%
East Midlands 7.2% 7.1%
East of England 7.7% 7.6%
London 7.3% 7.3%
North East 7.4% 7.3%
North West 7.5% 7.8%
South East 7.1% 7.4%
South West 7.5% 7.4%
West Midlands 7.5% 6.6%
Yorkshire and The Humber 6.9% 7.4%


Gender Personal Inflation
January 2007 June 2007

Male 7.1% 6.5%
Female 7.9% 7.6%


Age Range Personal Inflation
January 2007 June 2007

18 - 25 5.9% 6.9%
26 - 33 6.8% 7.5%
34 - 41 7.4% 6.4%
42 - 49 7.6% 7.6%
50 - 57 7.6% 7.2%
58+ 7.6% 7.1%


Notes:

(1) An online survey of 1,271 Fool.co.uk readers conducted between 6 June and 22 June 2007 - Fool.co.uk: Inflation Index - Six Months On

(2) Fool.co.uk news release: Consumers Reveal The Truth About Inflation - 12 January 2007.

(3) Office for National Statistics: Consumer Price Indices - 12 June 2007.

By Sonia Rehill
soniar@fool.co.uk
http://www.fool.co.uk

For further information and/or to arrange an interview with David Kuo please contact:

Sonia Rehill, Fool.co.uk, on 020 7297 8159 or Soniar@fool.co.uk
Sophie Jones, Fool.co.uk, on 020 7297 8160 or Sophiej@fool.co.uk

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