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BubbleBlower

Question And Inflation

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Here is a question that has puzzled me for a long time. When we measure inflation in the economy we pick a basket of goods and measure how their price hanges over time. The choice of what goes in the basket affects the result, and we get political manipulation in the indices as we see in the differences between RPI and CPI, for example.

Why is there not a inflation index where the basket is defined by what people actually spend money on?

If there is such a beast could someone point me towards it? If there is not how would it be defined: assuming that we have all the statistics about what the population spent their cash on every month how would we decide what went into the basket? Are we looking for something analogous to the "mean" spending pattern, or the "median" spending pattern. Lastly, and most importantly: what would this hypothetical index be doing right now? Would it point to deflation because of belt-tightening, or inflation due to rising costs?

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The basket is meant to represent what people spend money on; when tinned pineapple becomes less popular, it is removed from the basket; when avocados become the salad fruit of choice, they are added.

One difficulty with this is that price changes influence spending patterns. Suppose pasta is in the basket but smoked salmon isn't. One year a catastrophic pasta harvest quadruples the price, while a new salmon-on-steroids technology halves the price of salmon. People stop buying pasta and start buying salmon. So now salmon is added to the basket and pasta removed. But look - the item whose price has increased has been excluded from the index; the item whose price has fallen is now included. It is widely considered that this adds a systematic downward bias to the system (particular relevant in the case of electronics which get cheaper every year).

The biggest problem for me with the inflation indices is the failure to reflect the fact that for many households, half their income goes on housing costs. Housing is included in RPI - I think, but in a very stupid way: mortgage interest on a £100,000 loan is included. Therefore if house prices quadruple but interest rates halve, housing is considered by RPI to have halved in cost. There is also an element of rental cost included, which seems to be better thought out.

On the other hand, peoples' situations are so different that it's hard to be sure that "inflation" - a single figure applied across the economy - actually means that much. For instance, I have large savings in a bank account simply to buy a house. These savings dwarf any expenditure I might have on food, petrol, heating etc. So my personal inflation rate is actually the house price inflation rate. If food, petrol, heating triples in price but houses halve, CPI and RPI will go through the roof, but the spending power of my cash will have more or less doubled.

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One difficulty with this is that price changes influence spending patterns. Suppose pasta is in the basket but smoked salmon isn't. One year a catastrophic pasta harvest quadruples the price,

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The basket is meant to represent what people spend money on; ....

One difficulty with this is that price changes influence spending patterns. Suppose pasta is in the basket but smoked salmon isn't.

Thanks for the thoughtful reply. This snippet of what you said gets to the heart of what I'm asking: why do we use a small basket of goods as a sample of what people are spending money. You point out at least one inaccuracy / bias that gets introduced by attempting to model all spending in the economy by a small sample. If we have the raw data (and by we I actually mean the government who could get their hands on it) why not calculate inflation directly from the full dataset?

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Thanks for the thoughtful reply. This snippet of what you said gets to the heart of what I'm asking: why do we use a small basket of goods as a sample of what people are spending money. You point out at least one inaccuracy / bias that gets introduced by attempting to model all spending in the economy by a small sample. If we have the raw data (and by we I actually mean the government who could get their hands on it) why not calculate inflation directly from the full dataset?

because that would be more accurate and expose what inflation is to a wider audience.

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Inflation indexes only measure the cost of surviving not the reduction in the value of currency. If all foods people would prefer to buy become unaffordable so the whole of the UK buys unattractive options like spam, baked beans & McDonalds because they stayed cheap, the RPI would only include the ones that people are buying. In reality people would much rather be buying fresh meat, fresh fruit etc and need the Bank of England to target prevention of the reduction in the value of the pound not preventing some manipulated basket of goods from becoming expensive.

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Here is a question that has puzzled me for a long time. When we measure inflation in the economy we pick a basket of goods and measure how their price hanges over time. The choice of what goes in the basket affects the result, and we get political manipulation in the indices as we see in the differences between RPI and CPI, for example.

Why is there not a inflation index where the basket is defined by what people actually spend money on?

If there is such a beast could someone point me towards it? If there is not how would it be defined: assuming that we have all the statistics about what the population spent their cash on every month how would we decide what went into the basket? Are we looking for something analogous to the "mean" spending pattern, or the "median" spending pattern. Lastly, and most importantly: what would this hypothetical index be doing right now? Would it point to deflation because of belt-tightening, or inflation due to rising costs?

...everyone has their own unique inflation footprint....the basket's are a 'guesstimate' at average purchases open to manipulation ....but who should have final say ...?.....it's all an act of smoke and mirrors ....what we do know is prices go up and some even come down ...to adjust your own profile just cut back or drop as many items as you can which are rising steeply.... :rolleyes:

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good post - thx

In the USA steak was replaced with ground beef. This led people to question if the underlying policy reflected lowering of quality of life and convergence with chindia......

The basket is meant to represent what people spend money on;

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Here is a question that has puzzled me for a long time. When we measure inflation in the economy we pick a basket of goods and measure how their price hanges over time. The choice of what goes in the basket affects the result, and we get political manipulation in the indices as we see in the differences between RPI and CPI, for example.

Why is there not a inflation index where the basket is defined by what people actually spend money on?

If there is such a beast could someone point me towards it? If there is not how would it be defined: assuming that we have all the statistics about what the population spent their cash on every month how would we decide what went into the basket? Are we looking for something analogous to the "mean" spending pattern, or the "median" spending pattern. Lastly, and most importantly: what would this hypothetical index be doing right now? Would it point to deflation because of belt-tightening, or inflation due to rising costs?

And it also have some funny features of substitute. So, say everyone was driving a Toyota Freelander 4x4 and the price of that goes up a lot and now people drive a Toyota IQ, Toyota IQ probably replace the Freelander 4x4 component and now the cost of motoring 'goes down' (the weighing might get adjured, but the index will probably still say cost of living coming down despite people now have to contend with less interesting things. As far as I know, the hedonic adjusteds are not made if that make the index lower)

Also, if you used to get a seat in a train where you pay £10, now you don't get a seat in a train (due to overcrowding) but still pays £10, the index remain unchanged. If you buys a computer twice as fast for the same price, then its effective cost is considered 'half'.

Edited by easybetman

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If you buys a computer twice as fast for the same price, then its effective cost is considered 'half'.

But in the context of gdp it does twice as much work and so represents an increasing gdp-the good ole' double whammy, rising gdp and falling inflation brought about by no more than statistical manipulation lies

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Taken to the extreme, using current substitution methods if you were reduced to a bicycle for all your transport and rice for food, your inflation rate for transport and food would be related only to the prices of those two items. When you look at such extremes that you can see how this metri is just a screen to hide the fiat money fraud system behind.

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Taken to the extreme, using current substitution methods if you were reduced to a bicycle for all your transport and rice for food, your inflation rate for transport and food would be related only to the prices of those two items. When you look at such extremes that you can see how this metri is just a screen to hide the fiat money fraud system behind.

Well put.

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Google are about to produce an index. The key thing to bear in mind is these are not indices of inflation but of prices, hence their name - retail PRICE index - for example.

Producing an index of "what you buy" would include property for example. So a major HPC is deflation at a catastrophic level. If you think like that you need to prevent property prices crashing. Ten grand off the "typical" house purchase far outweighs a few pence on petrol or a quid or two on a bottle of scotch. This is why we have idiots like AEP in the Telegraph screaming inflation while house prices are dropping.

The answer is to "weight" things like property to reflect the fact people only buy one now and again. Since no two people ever buy the same things with the same frequency everyone has a different view about whether prices are going up or down or by how much in either case.

Even this solution is flawed as it misses out the resale of things that you no longer want or need. Reselling property often results in more money back than spent. Reselling your old TV on ebay for a fiver on the other hand is less lucrative. One solution is to only measure consumables - food, petrol, electric and so on. This measure would perhaps be best called a "cost of living" index. It is going up big time.

Economist talk of inflation as the increase of money supply. That's why AEP talks so much cr@p. The government is increasing money supply through QE. However this is more than offset by the write off of bad debt by the banks. Now you need to break that down into what "type" of money the economists are talking about; M1, M2 etc.

There's a old saying which I don't remember exactly but is along the lines of ask four economists their views and you get six answers.

Most stuff is going up in price if you buy in sterling. Let's leave it at that before someone gets Injun started with his weird line of drivel :)

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Personally I would like to see, to run alongside the usual RPI and CPI index, a separate very simple but powerfully illustrative Essentials Price Index - based on the rise in cost of items we all have to 'buy' just to live regardless of whether we are homeowners or renters. 'Have to' if you live lawfully, exercise some precautionary commonsense and participate and interact in normal society (e.g you do not live the life of a hermit and will, on balance, likely buy at least one first class postage stamp in any one year, or need at least one doctors prescription, consume a loaf of bread a week, etc)

Things like Council tax, personal possessions insurance, national insurance (as opposed to income tax), etc.

When council taxes rise it's usually by an across the board percentage. Such that it doesnt matter if you live in a Band A rated property of Band E, if the tax rises its the % that matters. Similarly, its not the actual amount of NI you might be paying but the effective % rise in the amount you will have to pay when Government X announces its latest budget proposals.

Are you a car owner? Then the annual % which your car tax rises by. If not a car owner, then the % local bus fares rise by.

The food component of this essentials index should be kept very simple with universal, timeless foodstuffs like milk and bread - thus leaving out the ability to fiddle the index with periodic chaages to components due to claimed lifestyle changes. Almost by definition, foodstuffs that are not as popular today as they once were, are discretionary non-basic foodstuffs, e,g certain types of confectionary that are now no longer as widely consumed as in times past.

I believe such an index would be far harder to disguise longer term inflationary trends.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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