Inflation is a measure of the average rate at which the prices paid by consumers for goods and services is increasing. The official measure of inflation is the Consumer Price Index (CPI).
Every month 200 "pricers" from the Central Statistics Office (CSO) visit a fixed panel of shops, supermarkets and other retail and service outlets throughout the State, noting the prices of a wide variety of goods and services.
Aimed at measuring the overall change over time in the prices of the goods and services that an average household typically buys, some 43,000 prices are collected every month in 82 cities, towns and villages throughout the State. An additional 3,000 prices are gathered monthly, quarterly or annually by post and telephone by the CSO pricers. These prices are then compared to the prices from the previous month. The prices measured include indirect taxes such as Value Added Tax.
The monthly inflation figure, or CPI, is calculated from a comparison of the prices of about 985 different goods and services. The basket of goods and services on which inflation figures are based consists of some 560 items within 10 commodity groups. These are: food, alcohol, tobacco, clothing and footwear, fuel and light, housing, durable household goods, other goods, transport, and services and related expenditure. The "basket" of items measured includes mortgage repayments, home insurance, motor tax and insurance, hairdressing and taxi fares.
Since some of the items are broken down into more detailed sub-categories - for example the item "beef" is measured under five different cuts while under the heading of "chicken" there are four price breakdowns - in all, the prices of some 985 items are measured. Once selected the same item/brand is priced monthly to ensure matched price quotations.
The goods and services in the basket are determined from a household budget survey, with the items given degrees of importance or weightings based on the household expenditure information collected in the Survey.
Is it a representative sample of items people buy? The CSO argues that it represents the consumption of "the average household", but not necessarily that of any one individual household. Rejecting "the ciabatta bread" argument - that this type of bread should be included - the CSO said that while this may be representative of consumption in some areas of Dublin it would not be representative of consumption in the State as a whole.
Does the CPI capture the rise in the cost of living? Consumers often comment that they can see the prices of the goods and services they buy rising faster than the official rate of inflation. This happens because of the weightings within the consumer price index basket.
The price of a product or service may rise very rapidly but this will only be reflected in the overall rate of inflation if its weighting in the basket is quite large. For example, a 2 per cent rise in the price of petrol has a greater impact on the inflation rate than a 20 per cent jump in the price of mayonnaise. For this reason, the rate of inflation overall may be low while the prices of some goods and services are rising sharply. In addition, the CPI is a pure price index and not a cost of living index so it does not take account of changes households make in the pattern of their expenditure.
Analysis of the movements of prices in the 10 commodity groups helps to identify the source of increases in inflation. In May consumer prices rose by 0.7 per cent, pushing annual inflation for the 12 months to end May to 5.2 per cent.
A breakdown of the commodity groups over the month (see table) shows that the most significant price increases were in housing (+2.2 per cent), tobacco (+1.4 per cent), food (+1.3 per cent) and alcohol (+1.2 per cent). Prices fell in the transport (-0.5 per cent) and fuel and light (-0.5 per cent) commodities, reflecting the fall in crude oil prices in April.
But because it has the biggest weighting of all the commodities, the rise in food prices accounted for 0.3 per cent of the O.7 per cent May price increase. Alcoholic drink and housing each accounted for 0.16 of the 0.7 per cent increase while services and tobacco each accounted for .08 per cent.
The rise in housing costs reflects increases in mortgage interest repayments, private rental costs and repairs and maintenance. The tobacco price reflects a general trade price rise, while the rise in the cost of alcoholic drink follows increases in the prices of beer and spirits. The increase in the food category reflected rises in the prices of potatoes, fresh fruit and vegetables, lamb and poultry and meals out.
Over the 12 months to the end of May tobacco showed the biggest price increase, up 17.1 per cent, partly reflecting an increase in excise duties in the December Budget. Transport costs were up 8.3 per cent, fuel and light up 7.1 per cent and services cost 6.4 per cent more than one year earlier.