How your iPhone affects the economy

by John Fitzsimons on 19 April 2011  |  2 comments
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It's not just a phone - it's also an important cog in the way our economy works!

Inflation has been back in the news again this week, with a surprise fall in the Consumer Prices Index measurement to 4% from 4.4%.

This has got an awful lot of people very excited, talking about how interest rates are now bound to stay at 0.5%, even though with inflation at 4% it is still double the Bank of England’s target. And such high inflation spells more bad news for savers, though you can still Beat inflation with this savings account.

But how does the Bank of England work out inflation? And what does your choice of mobile phone have to do with it?

The inflation basket

The Office for National Statistics uses a ‘basket of goods’ to calculate the rate of inflation for both its Consumer Prices Index and its Retail Prices Index (the two main measurements of inflation). However, this is not like your typical shopping basket that you have at the end of a shop at Tesco – there are more than 600 different items in there, covering everything from food shopping to furniture, clothes and leisure services.

And the goods in those baskets are adapted each year, as a reflection of the changes in what we have spent our money on in the preceding 12 months.

So what have we been forking out for this year?

iPhones, Angry Birds and Match.com

The developments in mobile phones have certainly affected our spending patterns, and that has been picked up in the new basket of goods. In come smart phone handsets and mobile phone apps. I remember when my mobile was there for making phone calls and texting girls. Now I use it to order pizza, do my weekly shop, check the state of the Tube, watch TV shows and download music.

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I’ve even downloaded apps in the last few months to measure my wife’s contractions when she was in labour, and then when my son arrived, to play ‘white sound’ noises like the hairdryer and the washing machine in order to send him off to sleep. It’s like a Swiss Army Knife, only far more useful.

Another notable addition to the basket this year is dating agency fees. Evidently we are all spending far too much time fiddling about on our phones to actually strike up a conversation with someone, and so have to rely on the multitude of dating websites to help us find love.

However, it’s not all technological innovations that have made it on to the list. Oven-ready meat joints have been added, as many of us simply don’t have the time to cook otherwise. And the good old-fashioned hardback fiction book has made it onto the list too.

Clearly not everyone is a devoted Kindle user.

On the way out

One of the losers of our love of smart phones and their apps have been mobile phone downloads. Why download a wallpaper or ringtone for your mobile, when you can use the pictures you’ve taken on your phone’s camera, or one of the songs that your phone can play, given most smart phones now also serve as mp3 players?

Another interesting removal is vending machine cigarettes. According to the Office for National Statistics, sales of these cigarettes have been in decline for some time, and new legislation will see the machines withdrawn this year anyway.

Also removed are vet fees for spaying kittens. Yes, really. Vet fees are apparently over-represented already in the shape of annual booster injections, while in some cases spaying is now performed for free.

Other items to bite the bullet that caught my eye were four cans of lager (to reduce the number of premium strength beers and add more balance to the basket) and rose bushes.

The changes in full

Below, I’ve put together a round-up of all of the changes to this year’s baskets. As you can see, in some cases the changes can seem somewhat pedantic – ditching two different flat panel TV measurements to replace them with three different measurements for example. However, changes like this are made so that there is more accuracy in the pricing of the basket, as there are obviously far larger differentials between the prices of various sized TVs, and this needs to be reflected.

Why it matters

At this point, you may be wondering, so what? What does this have to do with anything?

But the calculation of inflation doesn’t just tell us how the cost of living is changing – it also plays a big part in fiscal policy, the decision-making processes of institutions like the Bank of England.

After all, it’s precisely because inflation was seen to be on the rise that members of the Monetary Policy Committee began to argue that the time had come (at long last) for interest rates to increase. So the composition of these baskets, and getting them as accurate as possible to represent the spending patterns of ordinary Brits, is hugely significant to all of us, whether we are savers, borrowers, or a little of both.

Remember that the next time you consider whether it’s worth paying 59p to download the Flick Football app.

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