Britons are richer than they think

WE ARE all better off than we have been led to believe, says a report that claims inflation figures overstate an actual increase in the cost of living.

Although the retail prices index (RPI) is updated each year to take account of shifts in spending habits and adjusted for improvements in the quality of what we buy, it has not kept up with the changes, say researchers at the Institute for Fiscal Studies.

The Office for National Statistics is mid-way through work on how to improve measurement of changes in our cost of living, after the 1996 publication of the high-profile US Boskin Report, showing US inflation figures systematically over- estimated the pace of increase in the cost of living.

If the government could link benefits and pensions to a lower published inflation rate, it could save billions. But the extent of bias in the UK is likely to be small. The official figures already change the components of the RPI each year to reflect spending patterns and adjust prices down to take account of quality improvements.

Official measurement of the cost of living started in 1914, when the government started a prices index to protect the working classes from inflation likely to be caused by the war. It consisted of 80 "essential" items including clothing, heating and housing costs. Tobacco was thought essential for the working man, but not alcohol, and potatoes were the only vegetable on the list. In 1938 Ernest Bevin, then minister of labour, decided the index should be based on what workers bought rather than what a Whitehall official deemed as essential.

Eleven years later the precursor to the modern RPI was published, listing radios, gramophone records, football admission charges and beer. The massive watering down of beer during the war made the first quality adjustments necessary. As brewers strengthened their product the compilers adjusted the price per pint to reflect the improvement, and improved amenities in public houses.

Since 1962 official statisticians update the goods included in the RPI and make similar quality adjustments every February, on the basis of an annual survey of household spending.

Thus the wild rabbits (unskinned), lard and condensed milk included in the 1947 shopping basket gave way to canned fruit, ice cream and brown bread in the Fifties, fish fingers, crisps and sherry in the Sixties, to frozen-ready meals in the Eighties and vitamin pills in the Nineties. From the late Sixties a new category had to be added: eating in restaurants.

Some items last in the index for a few years - home perm kits, or coffee percolators. The biggest headache for the statisticians is keeping up with quality improvements in consumer electronics such as PCs and computer software. These fall rapidly in price, and advance rapidly in capability. The RPI shows a 20 per cent quality- adjusted fall in their price between 1974 and 1996, compared with its calculation of a real decline of 60 per cent.

The IFS also reckons the RPI should include the National Lottery because it accounts for 1 per cent of total consumer spending.

Unfortunately, though the statistics might have over- stated rises in the cost of living, the mis-measurement does not mean we have been better off than we felt - only better off than we were told.

The Changing Basket

1940s

Electricity

Gramophone record

Bicycle

Radio

Wireless licence

Cinema admission

Football entrance fee

Sewing machine

1960s

Sliced bread

Fish fingers

Crisps

Sherry

Electric cooker

Fridge

Restaurant meal

Jeans

Girdle

Infant's matinee jacket

Paper hankies

Motor scooter

1990s

Satellite dish

Camcorder

Multi-vitamins

Computer games/CD-Roms

Internet subscription

Foreign holiday

Eurotunnel fare

Leggings

Chinos

Replica football strip

Doc Martens

Private education fees

Aerobics class