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CPI Inflation Monetary Policy

October's official inflation figures for the UK, announced yesterday, took a turn for worst, and marked the end of period of falling inflation. CPI inflation now stands at 2.7%, up from 2.2% in September - which was the lowest rate since November 2009.

The ONS reported that upward pressure on average prices came from increased university fees which kicked in this month. Undergraduate tuition fees in England for UK and EU students have risen to a maximum of £9000 for this academic year, contributing to an eye-watering rise in education costs of 19%. Other significant increases have come from food and non-alcoholic beverages, and transport costs. Rising prices in these sectors were offset by downward pressure from housing and household services and recreation. The CPI index rose to 124.2,  based on 2005 prices (2005 = 100).

The impact of the rising tuition fees on the CPI would have been much greater were it not for the relatively low weighting education is given in the CPI index. The weights for clothing and footwear in 2012 were three times that of education (61 compared with 19, out of total weights of 1000). Indeed, weights for alcohol and cigarettes (at 42/1000) were twice those of education.

How the CPI and RPI are calculated has, of course, been the subjected of much scrutiny over the years, ever since the RPI was introduced in 1975 to get a fix on the rampant inflation associated with the mid-1970's oil shocks. Basing the weights on the 'typical' spending pattern of 'average' households has been the bedrock of inflation calculation ever since, and it is hard to justify any drastic alteration in methodology. The CPI itself was introduced in part to improve the ability of the index to update itself by taking into account changes in household spending based on the inflation that it was measuring. What the index does not do, and was not designed to do, is to give an indication of the likely negative impact of particular inflation on the future of the economy, and its economic performance. This job is left to the Bank of England, the Treasury, academics and professional analysts. Perhaps it is time for another general index with weights that reflect the significance of inflation in particular sectors to future economic well-being. Such an index would, surely, weight education at a much higher level, and give a better indication of the impact of higher tuition fees on the UK economy's supply-side performance, growth, jobs and the balance of payments.

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Source: ONS

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