How real are 'bargain' buys?

TRUDGE up and down any high street at the moment and there are clearly bargains to be had. Though Christmas is less than three weeks away most stores have been forced to introduce special offers in a desperate attempt to entice recession-wary shoppers.

Price-led advertising is everywhere. Tesco is offering 20 per cent off malt whisky to get shoppers to start Christmas with a headache. DFS Furniture is distributing leaflets advertising sofas with "double discount" offers. Even Marks & Spencer is wooing consumers with a "winter value" campaign on selected ranges.

How can we tell if we are getting bargains? Are prices really coming down or are we being lured by promotions while other prices are quietly raised? A new "Shop Price Index", to be launched this week, hopes to help clarify what is happening. Launched by the British Retail Consortium, representing 90 per cent of Britain's shop groups, the new index will be closely monitored.

The big supermarkets are already the subject of an Office of Fair Trading investigation into alleged profiteering. There is also a campaign focusing on the apparent disparity between British prices of items such as food, computers and cars, compared with those in continental Europe and the US.

The BRC has launched its own index because it claims the official Retail Price Index compiled by the Office for National Statistics is too broad to reflect shop prices accurately. There are concerns that the RPI tends to overstate inflation, which in turn can lead to higher interest rates.

First published in 1947, the RPI includes the cost of "services" as well as goods. So, as well as groceries and clothing, the figures include rent and mortgage payments, second-hand car prices, satellite TV subscriptions and aerobics classes.

Though few would dispute the merit of measuring inflation in this way - the ONS figures collect the prices of 600 items in 85 categories every month - the BRC says it can distort impressions of high street prices.

"Our aim is to present the true story of inflation on the high street," said Pam Webber, a BRC economist. "The RPI does not give a very good guide to shop prices because it is so broad. We will be focusing exclusively on prices in the shops." The BRC will publish its figures in the first week of each month - just before the Bank of England's Monetary Policy Committee holds its monthly meeting to discuss interest rates.

All this matters because the measurement of inflation is crucial to economic planning. The MPC has a precise remit to try to keep underlying inflation (excluding mortgage payments) at 2.5 per cent. It uses the lever of interest rates to achieve that end. It uses as wide a range of economic data as possible to try to gauge whether inflationary pressures are growing. Anything that adds to the sum of the MPC's knowledge is welcome as it is more likely to get the level of interest rates right.

Inflation matters because of its effect on our behaviour as consumers. A high level of inflation leads to higher wages and a rising level of key investments such as houses. But it also means that demand is outstripping supply. It leads to higher interest rates and the kind of boom-bust economic cycle that has plagued Britain for much of the post-war period.

Low inflation or price deflation can deter shoppers from buying "big ticket" items such as cars, furniture and houses because they may feel they might be able to get them cheaper in a few months' time.

Do we need another measure of inflation? Some economists are sceptical and say the BRC has a vested interest in producing a set of figures which makes its members look very competitive.