Whose wallet is being hit by inflation?

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By Kevin Peachey Personal finance reporter, BBC News

The prices of the elements in a basic diet have been going up

How does the changing rate of inflation affect you? It can feel very different depending on who you are.

If you are one to sit down to a good book, with the heating on and some food and soft drinks at your side, it'll have cost you much more than a year ago.

But if you are younger and go out shopping for clothes and shoes, with the latest tunes playing through your headphones, you wouldn't have felt the pinch.

One study claims the "real" inflation rate is 1.5% higher for the over-75s than it is for the under-30s, and charities believe that pensioners and low-income families are being affected the most by rising prices.

But all of these people are wrapped up by the "official" inflation rate - and it is this that influences decisions made by bankers and politicians that affect their lives.

Number-crunching

The Office of National Statistics (ONS) announced that the Consumer Prices Index (CPI) rose by 3.3% in May, up from 3% in April.

The ONS needs to take a look at the basket of goods and whether there should be a separate index for pensioners Paul Bates, Help the Aged

The wider Retail Prices Index measure of inflation rose to 4.3% from 4.2% the previous month.

This figure is based on a basket of 650 goods and services which is updated annually to reflect spending habits.

During the last round of changes in 2008, fruit smoothies, muffins and portable storage devices such as mp3 players were popped into the basket, with frozen vegetarian ready-meals, CD singles, "stubbie" bottles of lager and 35mm camera films all taken out.

The ONS said this was aimed at reflecting the growing cafe culture of the UK.

But it added to the concerns of a charity such as Help the Aged, which is concerned that the basket of goods is out of step with the typical older person's spending habits.

"The ONS needs to take a look at the basket of goods and whether there should be a separate index for pensioners and other demographic groups," says spokesman Paul Bates.

AGE-RELATED INFLATION CLAIMS Aged under 30 - 3.3%Aged 30 to 49 - 3.7%Aged 50 to 64 - 4.1%Aged 65 to 74 - 4.3%Aged 75 and over - 4.8% Source: Alliance Trust

This is vital, he adds, because the official inflation rate is used to set the annual change in the basic state pension. Pensioners have been feeling the pinch for two or three years, he says.

Mr Bates says that ignoring holidays and cars, and putting more emphasis on food and fuel puts the annual rate of inflation for pensioners closer to 9% or 10% than the CPI of 3.3%.

Investment group Alliance Trust's study of age-related inflation is more conservative, estimating the rate of inflation for the over-65s to be 4.3% and, for the over-75s, 4.8%.

Only the under-30s perceive a rate of inflation that mirrors the official figure, the research claims.

Shona Dobbie, head of Alliance Trust's Research Centre, says that the elderly are hit hardest by inflationary pressures because they spend a bigger proportion of their income on basic goods such as food and utility bills.

The situation is set to get worse for them, she warns.

Consider the essentials

Joseph Rowntree's name lives on for his efforts in tackling poverty, with a foundation set up to continue the work. When his son Seebohm Rowntree decided to measure poverty among the working classes in York at the end of the 19th Century he also judged it on a basic basket of goods.

One family counts the cost of recent price rises

But it was based on basic rations given in the workhouses of the time. It included bread, bacon, margarine, cheese, dumplings, porridge, pease pudding and vegetable broth.

Nowadays, the accepted definition of poverty in the UK is a household having less than 60% of the national average income.

But the significance of dietary essentials on household finances remain. They are key to lower and middle income groups' perceived level of inflation - the rising prices that they believe really affect them.

The latest ONS figures show that over the past 12 months milk, cheese and eggs have shot up in price by nearly 17%. Oils and fats are up 20% during the same period.

Bacon and fresh vegetables were also up compared with a year ago as bad weather in the producing nations and increased demand had an effect on food prices.

The other big price risers in the last year were electricity, gas and other fuels (up 11%) and books (up nearly 13%).

Materials for doing up a house climbed by 5%.

In contrast, those with some disposable income to spend saw a 7% fall in the price in clothes in May compared with a year ago. Shoes were down nearly 4%.

Second-hand cars was another of the big fallers, down 5% on May 2007, along with audio-visual equipment which dropped by 14%.

Although the ONS basket of goods gives a representative selection of typical purchases, it makes no distinction as to which are necessities and which are luxuries.

The Joseph Rowntree Foundation is conducting an in-depth survey of what different groups of people consider are essentials for a basic standard of living.

The results will show people's changing priorities as they pay more and more attention to how far that pound in their pocket will go.