Wednesday, Feb 18, 2009
Fudged
Daily Mail: City analysts bothered and bewildered by inflation figures
Yesterday's inflation figures left City analysts feeling bewildered. Although RPI fell to a 49 year low, CPI, the Government's favoured measure, barely budged at a heady 3%.
The reason for the yawning gap is the absence of housing costs from the CPI.
It is ridiculous that the Bank is being asked to target a measure of inflation that ignores the cost of housing.
Back in 2003, Mr Brown switched the inflation target from RPI to CPI. Many suspected that, with house prices soaring, Mr Brown wanted to shift to a measure of inflation that excluded property to allow the Bank of England to cut interest rates.
In retrospect this was a grave misjudgment. Higher interest rates might have helped curb the explosive growth in house prices that is now ferociously reversing.
14 Comments
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1. Crunchy said...
Since when have numbers got in the way of an agenda over the last 10 year sham.
The figures we need to worry about are the one's in power. Future regulation my ar$. Future rigulation more like.
The futures bright.
The futures rigging Brown.
2. paul said...
Its taken the Daily Mail all this time to come to the same conclusion we reached about four years ago.
3. Eternal Sceptic said...
If city analysts rely on any government source of statics for their decision making, it ain't no surprise that Humpty Dumpty fell off the wall and cannot be resuscitated!
4. japanese uncle said...
Back in 2003, Mr Brown switched the inflation target from RPI to CPI. Many suspected that, with house prices soaring, Mr Brown wanted to shift to a measure of inflation that excluded property to allow the Bank of England to cut interest rates.
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As far as the Crash is concerned, this may possibly have been the case. But from a wider viewpoints (including those of the parties behind the scene), it may well have been intended to relieve the BoE of their one and only statutory obligation to duly react to soaring inflation by increasing IR, with the clear aim of allowing the already eminent housing bubble to be boosted to the very maximum.
5. jackas said...
I am ASTONISHED with a capital astonished at how inflation related events are portrayed on places like the BBC.
Prices are not falling. They are rising at a slower rate. Are these experts really predicting deflation? Or is the general public stupid enough to accept that there's boogieman out there that needs to be fought and so we'll do whatever necessary, including rob people of their savings through printing money..
I think I might start wearing turquoise tracksuits. I feel like I'm losing my mind.
6. cyril said...
I don't think it's ridiculous to target CPI because interest rates have such a direct impact on housing costs and hence RPI. If you included housing costs in CPI, surely increasing interest rates would automatically create higher inflation?
7. inbreda said...
cyril - correct, but it would mean that house prices would fall as a result, and would prevent the asset booms ,and subsequent busts.
8. pelethar said...
What paul said. It's amazing that a bunch of (mostly) unqualified punters on a website like this could clearly see that interest rates were too low for too long, and were able to be fairly accurate about what the consequences would be. Meanwhile every banker, economist, politician and property "expert" was talking about new paradigms and a soft landing. Now they are all collectively slapping their foreheads and saying "how did we not see this coming".
9. paul said...
cyril, that's the argument against RPI too, but it's not a very good one.
Does raising interest rates encourage people to save, pay down debt and banks to rebuild balance sheets?
Interest rates have not been having the textbook effects for some time, mostly because of a gradual attrition of the efficacy of the mechanism of lowering rates - in short they've been lowering them too much, too often so that they have become increasingly useless. Exactly what the article is saying too.
10. mark wadsworth said...
Once house price boom was properly underway, they moved from RPI to CPI (because RPI was embarrassingly high)
Last year, when house prices were going down but everything else was going up, Swervin' Mervyn muttered about going back to RPI (because that would have shown a lower rate at the time - and a low rate was seen as a good thing)
Nowadays, deflation is a worry, allegedly, so they prefer CPI again (which is showing a higher rate - which is now seen as a good thing)
Does anybody still believe a word they say?
11. paul said...
mark, I think you'll find that most papers are now quoting the RPI at 0.1% as evidence that we need to print more money a la Harare.
CPI is not budging much, so the message has gone to the media that they should quote RPI more prominently. I too, have no idea how and why this switch has been allowed to take place.
In fact, the 0.1% drop is suspicious - we've all aired our scepticism about the 'magical 0.1%' rise or fall. It is basically too small to show up anywhere but large enough to deny a movement in the undesired direction.
12. paul said...
Sorry just to clarify I'm talking about the 0.1% 'fall' in the CPI and that current RPI level of 0.1%.
13. mountain goat said...
You can fool some people all the time it seems.
14. stillthinking said...
I think that the BoE kept rates low to keep the value of sterling down, and hence the price of imports up. They should have copied other nations and directly intervened in the foreign exchange markets. Print up some sterling and buy foreign currencies (a reversible step and perfectly reasonable, no wealth being lost), thereby devaluing. Helping exports and limiting imports.
Looking at things from that point of view, in hindsight, the BoE seems to have copied the same strategy (lower rates) that the Japanese tried after the G7 central banks strengthened the yen (Loeuvre Accords), despite seeing the consequences of the huge Japanese real estate bubble.
From this, you could take the view that the strength of the UK financial sector gave us a dose of the Dutch disease but without the oil (which we also had, come to think of it....).