Rethinking UK Inflation: An Application of Engel Curves

Abstract

This paper investigates the accuracy of the UK Consumer Price Index (CPI and CPIH) in capturing the true cost of living from 2001 to 2023. Using an Engel curve framework, it examines whether official inflation measures systematically understate living costs, especially during periods of economic disruption. Findings suggest that both CPI and CPIH tend to underestimate inflation, particularly for low-income households, highlighting a potential downward bias in official statistics.