Cheap goods lighten the burden on inflation of rising energy costs

Petrol prices have soared, gas bills keep rising and water rates are up, so why hasn't inflation taken off more? The key is that behind those high-profile hikes, many goods are still getting cheaper and that keeps a cap on overall consumer price inflation.

Everyday life certainly seems pricier for most households. They have been hit by an 80% rise in energy bills over the past three years, council tax has risen and paying a pound for a litre of petrol is no longer out of the ordinary.

But at the same time the price of clothes, shoes, phone calls and electronic goods is falling. Cheap imports from China have cut the cost of goods from televisions to T-shirts. A camera that cost £100 a year ago is now likely to be nearer £70. Computers are down a tenth from last year and for those who pay for internet access, the "broadband bloodbath" among providers has kept those costs low too.

In the world of transport, second-hand cars are getting cheaper, road duty has been frozen for years and the rapid rise of low-cost carriers such as easyJet and Ryanair has kept airfares down.

All that gets picked up in the Office for National Statistics' monthly data. Its agents peruse the supermarkets and high streets of Britain, noting down the price of all the goods in the country's official inflation basket, which includes chicken kiev and hamsters among its quirkier items. Statisticians collate data on more than 600 goods and services and weight them accordingly.

While rises in gas bills, water rates and council tax may grab headlines, their impact on inflation is rather less dramatic given that they are only a small part of the basket. Gas and electricity make up only about 1.5% of the basket each.

All that leaves inflation at a pretty benign 2.5%, above the Bank of England's target but not so high that the governor Mervyn King has to explain himself in an open letter to Gordon Brown. Still, Mr King hinted yesterday that he was already picking out the writing paper and bracing for higher inflation ahead.

The Bank is worried about more energy price rises, with gas set to soar further this winter. That doesn't just inflate households' costs but can also force manufacturers and retailers to raise their prices.

Aside from that, there is the uncertainty about the impact of impending rises in university tuition fees, which will increase to £3,000 this autumn from about £1,000. The BoE estimates the increase could add 0.25 percentage points to the annual inflation rate.

One final uncertainty is food, which at 10% has one of the heaviest weightings in the inflation basket. Subdued food prices so far this year have kept a lid on inflation, but as any economist will explain, food is notoriously volatile. Mr King noted yesterday that the effect of a hot, dry July remains to be seen. The weather has already raised wheat prices, meaning bread is likely to go up in coming months and another staple prone to drought are potatoes.