Merryn's Blog

How to measure the real rate of inflation? Look at school fees

Inflation in the real world is much higher than government figures suggest. So what's a good way to gauge it? Private school fees.

What is inflation actually running at? Most people will tell you that their personal inflation rate appears to be running way higher than the official CPI numbers, and if you look at the individual prices you pay on a daily basis it does seem unlikely that price inflation in the UK could really be running at under 3%.

It is also true that the index the government use sometimes changes (let's not forget than only a few years ago the RPI was the standard measure of rises in UK prices no one ever mentioned the CPI) and that the baskets of goods that are used to make up the index change constantly.

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In the US, for example, the way in which inflation is calculated has been changed more than 20 times in the last 35 years. According to John Williams of Shadowstats.com, if it were measured as it was in 1990 it would now be around 5% (the official numbers today have it at 2.2%). And in the UK we are currently discussing changing the calculation of our RPI.

This all makes it hard to really compare where we are with where we were. So what can we look at if we really want to see how much the prices of the things we buy every day are really rising? I wonder if private school fees might be one thing to think about.

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Now before you all go nuts in the comments section about elitism, I will point out that this idea has nothing to do with who pays for it and how, it is simply to do with what it costs to create a school community. After all, a school needs and uses all the things most communities need and use. It hires staff. It uses energy for heating lighting and transport. It buys food. It buys computer equipment and furniture. It buys sporting equipment and it pays for building maintenance and insurance just like all other communities.

The difference between a private school and other communities is that these costs can't be much fudged, delayed or farmed out to other organisations. The school has to put a cost price on its services every year. So regardless of who ends up using the community in question, the price is interesting.

So what is inflation if you look at it this way? It is currently running at 5% and has been almost twice the rate of reported inflation since 2002, according to a report from Lloyds TSB (68% vs 37%). It is also worth noting that in 2002 the average private school fee was equivalent to 27% of average earnings. Now it is 35%. That gives you some measure of just how much real earnings have fallen in the last decade.

I asked Jonathan Asante of First State if he had a proxy in mind for inflation when I interviewed him yesterday (more on this next week). He does. And it's a good one.

He agrees it is tricky to find one for individual countries, but for a steer on global inflation he suggests looking at the difference between the rises in volumes and the rises in revenues at big multinational companies. These are the companies that have pricing power in most markets and are therefore more likely than most to pass on all the cost rises they see. And if you do that, at what rate does it seem that global currencies are being debased? Around 5%. It's a number that appears to make some sense.

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