Lived Inflation Methodology - Autumn 2023
Calculating Lived Inflation rates
The following data sources are used to create the historical lived inflation rates:
- Living Cost and Food Survey (LCFS) for expenditure patterns by various demographic subgroups.
- ONS Inflation tables
We generate monthly ‘lived inflation’ estimates for different household groups. For each month we match the LCFS expenditure of each group to the ONS categories of expenditure (COICOP). However, we do not include Council Tax expenditure from the LCFS as the ONS indicate that LCFS data alone would likely overstate council tax expenditure.
The latest available LCFS data runs to March 2022 and for months since then we estimate the lived inflation statistics using actual inflation rates matched with expenditure from the 2021/22 wave of the LCFS.
The 2021/2022 LCFS data is the latest available expenditure data outside of the Covid-19 pandemic and replaces the previously used 2019/2020 expenditure data for more recent years. The new LCFS data does not alter our prior key findings over 2022/2023 however the lived inflation estimates have changed for some demographic groups, this is particularly notable for Retired households and Single Parent households.
We generate two grouping variables based on household observational data, income quintiles and household composition. These are calculated for each LCFS wave separately.
To create income quintiles, we rank the equivalised household income variable (OCED scale) and take 5 equal proportions. The 1st household income quintile represents those in the lowest 20% of household incomes for that LCFS sample period and the 5th income quintile represents the highest 20% of household incomes.
For household composition, we use socio-demographic information to create the following groups: single without children, single with children, couple without children, couple with children, 3 adults or more and retired households.
From these grouping variables we calculate the total expenditure by demographic group for each COICOP expenditure category e.g. the total expenditure spent by single parent households on tea and coffee during 2021/22 financial year.
From these summed expenditure values, we calculate weights that are the proportion of total expenditure spent on each COICOP category for each demographic group.
These demographic specific weights are used to reweight the CPIH price level changes to generate an overall lived inflation rate for each demographic group.
Forecasting future Lived Inflation rates
The following sources are used to make assumptions about the price rises that will occur for different expenditure classes:
For electricity and gas inflation, we use the energy price cap announced by Ofgem at £1,923 until December 2023. From January 2024 onwards, we use Cornwall Insight predictions which are predicted to remain around £1,900 until the end of 2024.
For food inflation, the IGD predicts food inflation to continue to fall and eventually turn negative in mid-2024.
For all other categories, we used the Bank of England quarterly inflation forecasts from November as a base for overall inflation between November 2023 to October 2024. The weighting of expenditure proportions from 2023 CPI weighting is used to solve for the average expected inflation for all other classes for each quarter. We predict linear inflation changes between the quarterly inflation estimates.
The specific estimates included in our model are as follows:
For electricity and gas prices, we predict a 22.8% decrease for Q1 2024, 25.9% decrease in Q2 2024, a 12.7% decrease in Q3 2024 and then followed a 1.6% increase based on the latest Cornwall Insight forecasts.
For food inflation, we estimate from the IGD June forecasts that food inflation will continue to fall significantly from the peak in early 2023. As food inflation was lower than the forecasts for October 2023, we project a linear decline from 10% in October 2023 to the IGD forecasted food inflation rate of 5% in March 2024.
For all other categories, based on solving for the Bank of England quarterly predictions, we estimate that inflation for all other categories will be 5.5% in November 2023, 5.7% in February 2024, 5.4% in May 2024 and 4.8% in August 2024 and 3.8% in November 2024 with linear changes between each quarter.
Sensitivity tests
We ran an alternative scenario in which all categories other than electricity, gas and food, were kept at the current rate of inflation as-at October 2023. However this led to higher than expected overall inflation compared with external estimates e.g. Bank of England.