If we ignored the fact that vacuum cleaners were a rare luxury item in 1910 and applied today’s quantities to calculate the 1910 consumption basket, we would greatly understate the increase in the average cost of living. And, of course, Harrods today is not exactly the typical place to go shopping - there was not much talk in 1910 of suburban shopping centres, or of Internet shopping. Ignoring developments in retail practice introduces an outlet bias. Had the bias remained constant over the years, this would have been less of an issue for measuring retail price inflation, but it clearly has not. Quality change bias, new product bias, substitution bias and outlet bias - these are some of the issues 7 that the Boskin Commission discussed in their report on measuring inflation in the United States. The finding of the report, which generated wide national and international interest, was that the US CPI might have overstated changes in the cost of living by between 0.8 and 1.6 percentage points per year. The examples I have given show how difficult it is to measure changes in the price level over time. Precision is not to be had. According to the official retail prices index, the general level of retail prices rose by a factor of 52 between 1910 and 2002. But changes in the nature of the goods and services available, and the nature of retail selling, make such comparisons treacherous. Does this matter for price stability? Probably not.
demand growth (1997-2002 Q1)  3.8  3.9  2.3  –0.6  Cumulative difference  –7.5  –4.2  0.8  0.9  Note: Growth rates are calculated as the total increase in output (and domestic demand, respectively) over the period 1997 Q1-2002 Q1, based on quarterly data, expressed as a four-quarter growth rate. Cumulative difference is the cumulative growth rate, expressed as a percentage, of output less domestic demand. Source: ONS (for UK data); Thomson Financial Datastream (for data on the Euro Area, US and Japan). Three possibilities deserve consideration. First, the rapid growth in household consumption averaging over 4% for the last five years - may reflect an adjustment to higher real disposable incomes. Consumption growth would then slow naturally as spending and debt reach their new levels. The imbalance between domestic demand and output would unwind as steadily as it built up, with no reason to fear a sudden correction. For this to occur the source of higher disposable incomes must be permanent. In part the increase in recent years has resulted from the improved terms of trade - 7% up on five years ago - which raise real national income for any given level of output. The main threat to the persistence of that improvement is the possibility of a fall in sterling that may be a necessary part of the rebalancing of the UK economy. It is very hard to assess the risk of that over any given time horizon.