Champagne and iPods make an entry into inflation basket

Music downloads today become the first "virtual" good to enter the basket of items that is measured each month to produce the official inflation figure, it was announced yesterday.

In a belated recognition of the advances that cutting-edge technology has made for consumers, the Government's statisticians have included a batch of hi-tech items in the basket of 650 goods and services.

Downloads join the MP3 player - perhaps best known on the high street as the iPod - flat-screen televisions and digital camcorders.

In total, 26 new items enter and 30 exit the basket as the Office for National Statistics carries out its annual exercise to ensure it keeps pace with trends on the high street and in the home.

But because of this "lag" effect, the annual review has gained a reputation for including an item just as it has gone out of fashion - and vice versa. This year, however, it has managed to avoid that trap.

Champagne, of which the UK has been the largest importer for 10 years, replaces imported sparkling wine in the off-sales category. The ONS said the swap reflected "evolving consumer tastes". Last year, it added champagne sold in bars and restaurants to the list.

The ONS said the changes were part of a process of continual improvement to ensure it is representative of consumer spending. "Changes to the basket should not be taken to represent a change in the popularity of goods that are added or dropped," a spokesman said. "They will reflect evolving consumer tastes, but only over a long run of years."

This year, the iPod generation is officially "in" but muesli-eating, Lambrusco-swilling, slipper-wearers must accept the inevitable verdict - their lifestyle is passé. These three are joined by frozen whole chickens, coleslaw, dishcloths and hot milk drinks in falling out of the inflation figures.

Slippers, with children's sandals, leave the basket for the first time since it was drawn up in the post-war rationing days of 1947.

Some changes are a telling insight into social changes in the UK. In terms of young girls' fashion, dresses have been replaced by trousers in line with trends among older women.

Nanny fees have come in to supplement window cleaners and gardeners. Meanwhile, international money transfer fees join the basket, reflecting the growing volumes of cash sent home by migrants workers in the UK.

Complaints about the growing trend of charges for events at state schools have been confirmed by the inclusion of "after-school" club charges.

But while sociologists focus on what the departures from the index tell us about changes in social patterns, economists are more interested in the changes going forward.

One of the major issues the Bank of England's Monetary Policy Committee and City economists in general have to deal with is the divide between falling goods prices and soaring services inflation.

Part of the reason for the fall in goods prices has been the IT revolution that has seen hi-tech goods prices fall even as their quality improves. A DVD player, for example, has slumped from more than £300 to £30 in a matter of years. Danny Gabay, a director of Fathom Consulting and a former Bank economist, said the inclusion of items such as MP3 players was another example of that. "This is a continuation of a process that had been going on since 1997," he said. "We have negative prices for goods and fairly resilient services price inflation. These have offset each other so that inflation has been 0.5 per cent either side of the target throughout that period."

He said "at the margin" the inclusion of more goods that were more likely to fall in price than those going out could result in lower inflation. He said it could open up the gap between the consumer price index (CPI) measure of inflation, which the Bank must target, and the GDP deflator, which is a better measure of domestically generated inflation. "Given that they target CPI, it could, on balance, lead to looser monetary policy [interest rates] than would otherwise be the case," he said.

The inclusion of these goods will also revive the debate about adjusting inflation for improvements in quality - known in technical language as hedonic pricing.

The method of collection if still relatively low-tech. Collectors feed back 120,000 separate price quotations each month. The rise - or fall - in the price of Champagne alone will be based on some 150 prices of different brands sold in a whole range of shops.

This should please John Maynard Keynes, who once said: "My only regret in life is that I did not drink more Champagne."