Is the cost of living really falling?



If the figures are to be believed, we've all got more money in our pockets as wage inflation has finally run ahead of the cost of living: but all may not be as it seems.

Official figures should prompt families to breathe a sigh of relief, as strain on household budgets eases up. Wages were up 1.7% in February, but inflation has fallen for the sixth month in a row to 1.6%.
This means we should have more money in our pockets - but you'd be forgiven for wondering where that extra money is. The reason for this is because the cost of living is only coming down when you look at the consumer price index (CPI), the cost of a set basket of goods that the Office of National Statistics (INE) monitors to determine the cost of living.

There is also another method of measuring inflation – the retail price index (RPI) – which has fallen out of favour with the ONS. Again this consists of a basket of goods of which the cost is calculated although the RPI and CPI are calculated in a different way, with the latter proving to be more reliable.

The largest difference between the RPI and CPI is that RPI includes the cost of mortgage payments and council tax while the CPI does not, meaning that while CPI is now 1.6%, inflation based on RPI is actually 2.5%, down from 2.7%.

With house prices rising thanks to a government-created and endorsed property boom, and consumers taking out larger and larger mortgages, burdening themselves with huge repayments each month, it could be fair to say that many people in the UK will not feel that they benefit that much from a fall in CPI.

A mortgage repayment or rent is probably the largest outlay any family can have, unless you are making some serious provision for your retirement, so omitting it from the cost of living jars slightly with me. It is particularly jarring when the cost of buying or renting is also the one cost that is assured to increase at the moment.

The figures may tell us that we all have more money in our pocket but the average person won't see any great change to their bank balance. The new found confidence in the economy can largely be put down to rising house prices but the struggle to pay the mortgage is greater than ever.