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Spend & Save

David Prosser: In the real world, inflation is soaring

Mortgage borrowers will no doubt have breathed a sigh of relief following the Bank of England's announcement this week that inflation unexpectedly fell to 2.4 per cent during July. If prices are rising more slowly than thought, there is less chance of another rise in interest rates this year to follow this month's surprise increase.

But are prices really rising so slowly? Within two days of the Bank's announcement, Powergen, one of Britain's biggest energy companies, announced its second price hike of the year - this time, bills will rise by almost 20 per cent. Meanwhile, council tax bills are also rising faster than inflation - they increased by an average of 4 per cent in April - while water rates are up by 5.5 per cent on last year.

The Bank of England calculates inflation by looking at the prices of a basket of goods. As with any statistical measure, it is an imperfect science that sometimes produces an accurate reading and at other times is wide of the mark.

But the debate about whether the official picture of inflation is accurate is not simply an academic one. For one thing, there's the obvious question of whether the Bank's Monetary Policy Committee is making the right decisions on interest rates if it is being given a misleading picture.

More worrying, in my view, is the fact that for more than 10 million people who receive state pensions, the annual increase in their income is linked to inflation. If the official rate of inflation understates the amount by which the cost of living is really rising, pensioners end up significantly worse off.

The current mismatch between inflation figures and rising prices is particularly difficult because council tax, water rates and fuel bills are all items of expenditure that pensioners cannot avoid. As all three eat up a greater chunk of pensioners' income, levels of poverty among older people are certain to rise.

In theory, there is a safety net in place to catch pensioners who fall below the poverty line. Under the Government's minimum income guarantee, pensioners whose income falls below a set weekly amount can claim extra money in the form of the pension credit. Moreover, the level of the guarantee is uprated each year in line with average earnings, rather than prices, and these tend to increase more quickly.

In practice, however, several million pensioners fail to claim the money they are owed. And in any case, increases in average earnings are still miles behind the utility bill hikes we've seen this year - the Bank put the figure at 4.3 per cent this week.

In other words, by understating inflation, not only do we risk getting fundamental decisions on economic policy wrong, we also seriously disadvantage a very sizeable chunk of the population. Given the hugely sophisticated tools available to the Bank's economists, there must be a better way to measure price rises. Alternatively, older people deserve extra help with fuel bills.

nnn If you live in Cornwall, Nationwide has some bad news. The building society says the county has more fee-charging cash machines compared with free ATMs than any other area of the country - six out of 10 Cornish holes-in-the-wall charge a fee.

But while Nationwide's campaigns are often spot on, this figure seems to me as misleading as the Bank of England's inflation numbers. The number of free ATMs in Cornwall hasn't fallen in recent times - it's just that fee-charging operators have installed machines in lots of locations that the banks don't find it economic to serve.

That sounds like good news. If you live in a more isolated part of Cornwall, you no longer have to travel so far to get cash, albeit at a price.