Fisher Investments UK

Why CPI Won’t Reflect Your Cost of Living, According to Fisher Investments UK

Developed nations’ consumer price indexes (CPI, a government-produced measure that tracks price trends) rose sharply in 2021’s first half, especially in early reopening countries like America.[i] That has stirred concerns faster inflation—i.e. prices rising across the economy—is here to stay, amongst financial publications Fisher Investments UK’s research analysts follow. Some consumers’ personal experience may even exaggerate price changes, making them question CPIs’ accuracy. However, as we will explain, CPIs are quite unlikely to closely reflect your personal cost of living—a distinction worth keeping in mind for investors, in our view.

CPIs aim to measure the change in prices in a given area over time. To accomplish this, statistics agencies create a broad basket of goods and services to serve as a representative model of prices across the entire economy. For example, the UK’s Office for National Statistics (ONS) tracks over 720 representative consumer goods and services—collecting 180,000 separate price quotations each month—from around 140 locations across the UK.[ii] These goods and services range from food and clothing (e.g. pork sausages and children’s pyjamas) to housing and transport (e.g. nanny fees and bus fares).[iii] The ONS also updates its CPI basket annually to account for changes in consumer tastes.

CPI is a macroeconomic statistic and a tool for policymakers. For example, monetary policymakers may consider CPI data as part of their decision-making—e.g. if prices are running hot, they may call for changing policy to restrain lending (and vice-versa if prices are falling). But in part because of their breadth, these gauges could differ greatly from any individual’s cost of living—a household’s expenses based on its unique characteristics.

Consider the variance in pre-pandemic spending amongst some hypothetical households, all living in Cardiff. A single young person may split an apartment with roommates—keeping their housing costs down—but their preference to eat out often subjects them to restaurant-related prices. A family of four may have most of their meals at home, but with two children in school, they face costs associated with education, children’s clothing and more. A retired couple may spend more on travelling—and also medical services—than the other two groups. No nationwide CPI can perfectly reflect households’ specific costs, in our view. Even the food component of CPI may not match your personal grocery shopping habits. For example, if prices surge for couscous and gluten-free breakfast cereals—two food items the ONS tracks—you may not notice the change at all.

We also think it is beneficial for investors to recognise their own costs won’t reflect their nation’s inflation rate. If an individual tracked their grocery shopping over the course of a year, the price change amongst the most common foodstuffs purchased won’t indicate much about inflation. Paying more for eggs in August 2021 than you did in August 2020 doesn’t mean prices are rising broadly. Note, too, CPIs may show information that doesn’t reflect an individual’s reality. In terms of housing costs, a homeowner isn’t subject to rising rents. But some CPIs—e.g. in the UK and US—account for imputed rent (Eurostat’s Harmonised Index of Consumer Prices, or HICP, recently embarked on an effort to adopt this methodology as well). Imputed rent is the estimated amount a homeowner would pay to rent their own home. Homeowners don’t actually pay this cost, but some statistics agencies track it to get a sense of housing prices. Eurostat, by contrast, includes only actual rents in HICP.

We think recognising these distinctions in what CPIs show—and don’t show—can help investors focus on the prices relevant to their lives. In Fisher Investments UK’s experience, these categories can range broadly. Besides everyday items, some households may spend more on healthcare, education (e.g. university tuition for grandchildren), travel for holidays and more. We think it is worth taking the time to review the relevant categories in your life to see how prices have changed over time, as it may be a factor worth considering when developing an investment plan. Looking at just CPI likely won’t reflect your specific situation.

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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.


[i] Source: FactSet, as of 13/07/2021. Statement based on major developed world CPI readings, January 2021–May 2021.

[ii] “Consumer Price Inflation Basket of Goods and Services: 2021,” Philip Gooding, ONS, 15 March 2021.

[iii] Ibid.

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