Adjustments for inflation

5.11 Costs and benefits in appraisal of social value should be estimated in 'real' base year prices (i.e. the first year of the proposal). This means the effects of general inflation should be removed. The effects of converting values from nominal to real terms are shown in Table 1 using a GDP deflator of 2%.

5.12 The following should be used to adjust prices from nominal to real terms:

  for short time horizons, whole economy inflation (the "GDP deflator") from the most recent forecasts by the Office for Budget Responsibility (OBR)

  for long time horizons, forecasts of the GDP deflator published in the OBR Fiscal Sustainability Report (FSR)

  for longer time horizons, beyond the end of the OBR's FSR, the GDP deflator should be extrapolated using the growth rate in the final year of the OBR's projection

Table 1. Adjusting for the Effects of Inflation (Using a 2% GDP Deflator)

5.13 For some goods or services there may be a relative price effect i.e. the movement of a specific price index (e.g. construction) may differ significantly from the general inflation (such as the GDP deflator). Where there is historical evidence and an expectation this will continue in the future, different rates of inflation can be used to reflect the relative difference. For example, Information Technology has become relatively less expensive over time and land used for development relatively more expensive. How prices change in relation to real incomes will affect this. Similarly, if supply is limited the price of the good may increase relative to inflation.