Inflation nears 7% in London

LONDON'S reputation as one of the most expensive cities in the world was reinforced today by claims that inflation in the capital is running at nearly five times the official national rate.The Centre for Economics and Business Research says London's astronomical cost of living, sky-high property prices and leaning toward private education, plus a couple of technical factors, mean Londoners face a rate of inflation of almost 7%. That compares with the official rate of just 1.5%.

Mark Pragnell, an analyst at the CEBR, said: 'The official inflation rate does not necessarily reflect what is happening in the real world.'

First, the official rate, based on the consumer price index, is depressed by the exclusion of housing costs, which have soared amid the property boom.

Second, the method used to calculate it - the geometric mean - reduces the impact of big price changes. Third, the CPI is adjusted to reflect technology improvements. So even if you to spend as much on a computer, the price is deemed to have fallen because it is more powerful.

Pragnell says adjusting the CPI to take account of these factors pushes UK inflation up to 4.4%. But for London, the gap between the official measure and reality is even bigger. Not only is London nearly 10% more expensive than the rest of Britain, the cost of living is rising nearly two percentage points faster than in the UK as a whole, at 6.35% a year.

The higher incidence of private education pushes up inflation further still for parents who have chosen to shell out on private eductaion. Fees at St Paul's School for Girls in Brook Green, for example, are just over £11,000 a year, and those of most private schools have risen sharply in recent years.

Pragnell said: 'Adding all these elements together, someone living in London with a child in private education who is not benefiting from the increased computing power of various electronic devices could claim to be facing an inflation rate of 6.9%, not the 1.5% indicated by the CPI.'

London and the South East bore the brunt of council tax rises this year. Bills in the capital soared 6.8% from a year earlier against 5.4% in the West Midlands and 4.9% in the North West.

Dan Bridgett of the London Chamber of Commerce said: 'Business confidence in London has now fallen to its lowest level since the Gulf War and rising inflation has been cited by many companies as a significant cause of their pessimism.'