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Consumer spending and inflation

The ONS has decided (10th January) that it will not, after all, fundamentally change its RPI measure of inflation. We thought it would be interesting, however, to take a broader look at how consumer spending has changed over the years, and how prices have changed in that time.

This chart shows how our spending habits have changed over the past 15 years or so, and how much each area of spending has changed in price. What we spend our money on matters, because it ultimately underpins the growth of our economy; Consumer spending accounts for more than 70% of all growth in demand since 1979.

The horizontal axis shows the amount we spend on each type of item compared to 1997, with 100 representing how much was spent in 1997. As a bubble moves to the right, it means we’re spending more on it over time. The size of the bubble represents how much we spend on the item, which can be used to compare spending between groups at any given time. The vertical axis shows the price level of each type of item. As a bubble moves up, it is getting more expensive.

Spending is broken up into 12 groups, as recorded by the ONS. Some of these groups (such as housing and transport) are self-explanatory. Others are a bit more cryptic and can be interpreted as follows:

  • Recreation and Culture: This includes a wide range of both goods and services, but its growth is dominated by computers and other electronic gadgets.
  • Miscellaneous: This covers a range of personal services (such as hairdressing and beauty therapy) along with financial services.
  • It’s also worth noting that the 'health' and 'education' bubbles only relate to private spending – government spending is calculated separately by the ONS.

So, what does the chart tell us? A few things stand out:

  • We spend a large proportion of our income on fairly basic things like housing and transport, and as we’ve got richer, our spending on them has grown in proportion.
  • The biggest growth area is in recreation and culture – and much of this is driven by electronic goods like computers, games consoles and stereos.
  • The price of clothing has fallen rapidly over the past 20 years – perhaps symptomatic of the shift in the textiles industry to East Asia – but our spending on clothing has still increased significantly, more than making up for the lower prices.
  • The price of private education has soared over the past 20 years, partly driven by the increasing cost of university.

In a way, none of this is particularly surprising. It tells us that as we have got richer, we’ve spent a lot more on luxury items, a bit more on things like housing and transport, and not too much more on food, drink and tobacco.

But the implications for Britain’s economy are much harder to fathom. Many of the electronic goods and clothes that have seen prodigious growth are imported from overseas, which helps to explain why our trade position has deteriorated so much. But the data does not explain why most of the new private sector jobs in Britain have come from business services, which don’t sell very much direct to consumers. The explanation for this lies in a more fundamental set of changes in the economy, which have seen businesses rely more and more on expertise from these service companies.

Source: Data taken from ONS Consumer Trends and Consumer Prices Indices
CVM stands for Chained Volume Measures. Also known as constant prices, this represents the price of a good removing the effects of inflation.
Current Prices reflect the price at a given period; that is, including inflation.