An inflation index is a tool used to measure price changes over time, in an economy. New inflation indexes are continually being reviewed by the ONS and the Bureau of Labor Statistics, though a simple observation of common confectionaries can also help illustrate headline inflation figures.
To understand the concept of an inflation index, it's important to understand the meaning of "index." An index is a ratio that compares the value of one item to another. It allows you to observe an item in terms of its relative value when compared to that of another item.
Monitoring the rate of inflation is crucial for investors and the status of their assets. Periods of high inflation are likely to have a negative impact on assets such as stocks and bonds. A common method to establish the rate of inflation is by calculating the change in the index from one point in time to another.
The most commonly used indicator is the Consumer Price Index (CPI) which measures the percentage change in the price of a hypothetical basket of goods and services consumed by households. The traditional basket of goods we use to calculate the change in the cost of living isn’t the only way some like to reflect the rate of change. It is criticised that the UK CPI is subjective in that it is a measure of price movements in a particular basket of goods, each with its own specific weighting. Though most individuals’ basket of spending are not necessarily in line with the official weightings and therefore everyone’s own rate of inflation is different.
Changes to the contents of the standard basket of goods are made to remain up to date and accurate and inclusive of consumer spending patterns. This is important to help to prevent potential biases that might otherwise develop. The procedures are also helpful to ensure that the indices reflect longer-term trends and changes in consumer spending patterns over time (for example, plant-based diets). Though, new items are being introduced to diversify the range of products bundled for existing groupings. As far as moving trends go, there are a few non-essentials that haven’t faded away with time. Unconventionally, confectionary goods to some are just as reliable a unit of account as gold.
An alternative measure that requires far less of an extensive insight of our economic conditions like the standard CPI, is Michael Bond’s ‘Mars Bar Inflation Index’. Like many other popular sweets, Mars Bars have been shrinking significantly for several years. As recessions have bit deep into our lives, the Mars Bar became a smaller bite.
Observations made on several instances suggest that the price of a Mars Bar correlates relatively accurately with the change in value of the pound since WWII. Similarly, the Big Mac Index has proven to be a good indicator of the actual relative purchasing power of world currencies.
Some may say that the Mars Bar is a currency for our time: it is an established basket of staple commodities (cocoa, vegetable fats, milk solids, sugar) wrapped with precise consistency and shape. Thus, it could be considered a reliable unit of account, as much as one would with commodities like gold, and preserves a surprisingly constant real value.
Over the years, results have shown that combining the effect of the smaller size and number of bars has amounted to an approximate price inflation of over 50%. With instances in the last decade that have equated to about 20% annual price inflation. This effect doesn't apply universally to all products, as each has its own inflation rate, but such hidden effects on our personal cost of living are interesting to discover.