Revealed: the real rate of inflation

The cost of living for many British households is up to four times the Government's published rate of inflation, The Daily Telegraph can reveal.

Millions of families are experiencing inflation far beyond the official rate of 2.4 per cent, new research suggests.

	Mervyn King, Governor of the Bank of England

The Government was last night accused of neglecting hard-up families as the research shatters the illusion that the Consumer Price Index - used by the Bank of England to set interest rates - represents the true cost of living as experienced by many households.

Pensioners are the hardest hit, with inflation rates of almost nine per cent, as record gas and electricity bills take a massive slice out of their budgets.

The revelation comes only days after the Government said there were no plans this year for extra cash for pensioners' winter fuel payments.

Both middle class and struggling families are also shown to be experiencing inflation well above the national average, as the increased costs of household bills, education and petrol erode their earnings.

The shadow chancellor, George Osborne, said: "This is a stark illustration of how real living standards are falling, particularly for pensioners and the most vulnerable in society.

"Millions of people are struggling as the cost of living is rising faster than their incomes. What a legacy for Gordon Brown after 10 years in Downing Street."

The research, produced for The Daily Telegraph by Capital Economics, reveals the enormous difference between the CPI and the inflation rates experienced by many families.

According to the study, pensioners' costs rose by 8.9 per cent in the 12 months to October.

Hard-up families, getting by on £20,000 a year, saw their costs increase by 4.6 per cent — almost twice the national average and well above the annual rate of wage increases, 3.9 per cent.

Meanwhile, the increasingly large number of young Britons living at home with their parents — and not paying mortgages or bills — experienced deflation of 2.1 per cent, since many of the items they spend their money on, such as clothes and electrical goods, are falling in price.

The figures are calculated using the Office for National Statistics' own inflation data, but made more representative by creating individual "shopping baskets" of goods and services for different types of households.

The massive difference between the CPI and the price rises faced by many families will be particularly upsetting for wage earners in the public sector — including teachers and nurses — since Mr Brown, the Chancellor, has asked public sector bodies to base their salary increases on the CPI.

It may also concern the Bank of England, which last month raised interest rates to five per cent amid fears that those facing big cost increases will demand higher wage rises from their employers.

The CPI has come under repeated fire from politicians and consumer groups since the Chancellor introduced it in 2003 to replace the Retail Price Index as the Monetary Policy Committee's inflation target.

Although the Bank of England has frequently said that the CPI is an acceptable economic measure for the purpose of setting interest rates, it does not include many major costs for households — most notably council tax and mortgage payments, which were an important part of RPI.

But even when these are included, the households considered in the study are still shown to be experiencing a far greater rate of inflation than RPI, which currently stands at 3.7 per cent.

Pensioners could be facing the equivalent RPI inflation of nine per cent.

The figures indicate that middle class families, with a combined income of £100,000 and outgoings on school and university fees, are seeing their cost of living increase at an annual rate of 5.8 per cent, while families struggling financially are facing inflation of 5.2 per cent.

Young professionals and those living at home are seeing costs increase at a slower rate than RPI.

A spokesman for the Office for National Statistics said: "The CPI and RPI are specifically not intended to measure what people often refer to as 'the cost of living'."