"low Inflation" Charade

[El_Pirata]

Most of us here are in agreement that the CPI as a measure of inflation is at best ineffective, at worst entirely bogus.

It conveniently excludes the most significant costs of living - housing, fuel, council tax - and seems to be composed mainly of DVD players and TVs.

So while the CPI is chugging along at a tidy little 2.3%, out in the real world we all know that prices are rising steadily.

My question is the following: how long can this little charade go on? At what point does the the discrepancy between fantasy inflation and real inflation get so large that something has to give? At what point does Gordy have to stop pretending that we have low inflation?

And what will the political/economic/social fall-out of this growing imbalance be?

Any suggestions people?

[miser]

Most of us here are in agreement that the CPI as a measure of inflation is at best ineffective, at worst entirely bogus.

It conveniently excludes the most significant costs of living - housing, fuel, council tax - and seems to be composed mainly of DVD players and TVs.

So while the CPI is chugging along at a tidy little 2.3%, out in the real world we all know that prices are rising steadily.

My question is the following: how long can this little charade go on? At what point does the the discrepancy between fantasy inflation and real inflation get so large that something has to give? At what point does Gordy have to stop pretending that we have low inflation?

And what will the political/economic/social fall-out of this growing imbalance be?

Any suggestions people?

<{POST_SNAPBACK}>

As long as there is breath in that scottish windbag's lungs things will be spun out as long as possible.We all know that the inflation rate is a complete sham but does the majority want to face up to the fact?Do they eckers like.The vast majority of this country want to walk around with their fingers in their ears seeing labours restrictive view of what the government wants them to see and believing every damn lie just to keep this sham of an economy going.Does your average drug addict want to face reality without his regular fix?Joe public cannot face the prospect of realistic interest rates and realistic inflation figures because then the whole pathetic house of cards will come toppling down.We are going to have to go cold turkey and take the nasty medicine sooner or later and it appears to me that we are putting it off as long as we can............................

[VacantPossession]

Most of us here are in agreement that the CPI as a measure of inflation is at best ineffective, at worst entirely bogus.

It conveniently excludes the most significant costs of living - housing, fuel, council tax - and seems to be composed mainly of DVD players and TVs.

So while the CPI is chugging along at a tidy little 2.3%, out in the real world we all know that prices are rising steadily.

My question is the following: how long can this little charade go on? At what point does the the discrepancy between fantasy inflation and real inflation get so large that something has to give? At what point does Gordy have to stop pretending that we have low inflation?

And what will the political/economic/social fall-out of this growing imbalance be?

Any suggestions people?

<{POST_SNAPBACK}>

I've pointed this out on a few occasions here, but not many people seem concerned. I agree it is a complete farce. Indeed many people I know think that housing IS included and when I put them right they simply refuse to accept it.

What can you do?.....the vast majority of house owners don't care a fig what inflation represents.

VP

[farmerdring]

Most of us here are in agreement that the CPI as a measure of inflation is at best ineffective, at worst entirely bogus.

It conveniently excludes the most significant costs of living - housing, fuel, council tax - and seems to be composed mainly of DVD players and TVs.

So while the CPI is chugging along at a tidy little 2.3%, out in the real world we all know that prices are rising steadily.

My question is the following: how long can this little charade go on? At what point does the the discrepancy between fantasy inflation and real inflation get so large that something has to give? At what point does Gordy have to stop pretending that we have low inflation?

And what will the political/economic/social fall-out of this growing imbalance be?

Any suggestions people?

<{POST_SNAPBACK}>

if you can find a better way of measuring inflation i think many of the economies of the world would dearly love to hear it.

old gordon would probably like to hear it too.

inflation is a damned hard beast to understand and measuring it is haphazard in the extreme. rpi, cpi, rpix are just childs tools for trying to gauge a very very complicated and pervasive phenomenon.

on balance, since cpi tries to exclude volatile produce (speculative markets) by focusing more on groceries and the like, i think it is probably one of the best measures.

for example, house prices go up and they go down. a pint of milk on the other hand, is not expected to fluctuate.

i can understand the reasons behind using cpi rather than rpi and i don't think it is for the reasons you give.

the debate doesn't end there of course.

[birdie]

Does anyone know of a website (or elsewhere) where a person can see exactly how the CPI is calculated? With actual calculations and prices to show how the most recent and previous values were arrived at, and details of any changes in the way it has been calculated over the past few years.

[Flick]

Why would any house owner care?

If you have a mortgage; high inflation AND low interest rates is the best present any chancellor could give you, short of paying the mortage himself.

Also dont forget that the majority of the population arent ecomomists. I'll put my hand and and say that without what I have learnt on this site, (and I am only here because of the situation that most of us are in), I wouldnt really have a clue how inflation affects me either!

[Flick]

Does anyone know of a website (or elsewhere) where a person can see exactly how the CPI is calculated? With actual calculations and prices to show how the most recent and previous values were arrived at, and details of any changes in the way it has been calculated over the past few years.

<{POST_SNAPBACK}>

Here's a good start, for a detailed explanation of how the bastket of goods is made up.

http://www.statistics.gov.uk/articles/nojo...basket_2005.pdf

Edited September 9, 2005 by Flick

[farmerdring]

Does anyone know of a website (or elsewhere) where a person can see exactly how the CPI is calculated? With actual calculations and prices to show how the most recent and previous values were arrived at, and details of any changes in the way it has been calculated over the past few years.

<{POST_SNAPBACK}>

you could try this link

http://www.statistics.gov.uk/cci/nugget.asp?id=181

i hope you enjoy reading though

EDIT: actually, Flick's link is better.

Edited September 9, 2005 by farmerdring

[El_Pirata]

if you can find a better way of measuring inflation i think many of the economies of the world would dearly love to hear it.

old gordon would probably like to hear it too.

inflation is a damned hard beast to understand and measuring it is haphazard in the extreme. rpi, cpi, rpix are just childs tools for trying to gauge a very very complicated and pervasive phenomenon.

on balance, since cpi tries to exclude volatile produce (speculative markets) by focusing more on groceries and the like, i think it is probably one of the best measures.

for example, house prices go up and they go down. a pint of milk on the other hand, is not expected to fluctuate.

<{POST_SNAPBACK}>

The price of petrol is not particularly volatile, it has been rising steadily for the last few years! Just like houses!

I think that gives a very clear indication of the level of inflation.

And as for groceries, prices are liable to fluctations too. Take strawberries for example, all over the place.

Another point to make -in 2000, the price of petrol reaching 85p brought out massive protests. Now we've reached £1 in some places and...nothing. £1 is clearly worth much less than it was 5 years ago. Yet we have low inflation.

[BuyingBear]

if you can find a better way of measuring inflation i think many of the economies of the world would dearly love to hear it.

<{POST_SNAPBACK}>

It's called RPI-X and was used by the BoE until December 2003, it can't have been that flawed consdering the bank used it since 'independence' in 1997.

Obviously as far as the MPC are concerned it's flawed because it's now going north of 3%, even CPI is suffering from the same flaws, going from just above 1% to nearly over their 2% target in less than 12 months.

[BuyingBear]

Why would any house owner care?

If you have a mortgage; high inflation AND low interest rates is the best present any chancellor could give you, short of paying the mortage himself.

<{POST_SNAPBACK}>

Because his bills and tax burden are rising yet his salary will only be rising by RPI-X if he's lucky.

If they want to inflate their way out of this debt burden it works both ways, people will want 8-10% wage settlements.

[farmerdring]

The price of petrol is not particularly volatile, it has been rising steadily for the last few years! Just like houses!

I think that gives a very clear indication of the level of inflation.

And as for groceries, prices are liable to fluctations too. Take strawberries for example, all over the place.

Another point to make  -in 2000, the price of petrol reaching 85p brought out massive protests. Now we've reached £1 in some places and...nothing. £1 is clearly worth much less than it was 5 years ago. Yet we have low inflation.

<{POST_SNAPBACK}>

i didn't quite follow what you meant here?

petrol has gotten expensive very quickly and has certainly shown up in the huge cpi rise.

you have to interpret cpi for what it is though and not just say oh inflation is 2.3% and complain about it. petrol feeds into everything and so everything gets more expensive but this shouldn't be confused with inflation.

as for the strawberries, you are right. cpi isn't perfect, i didn't say it was. but, we don't buy that many strawberries and so it presumably gets a smaller weight in comparison to apples.

EDIT further, petrol is about 93p (so similar to 2000 adjusted for inflation) and guess what, 14th september has been penciled in as strike action day by the same organisers.

Edited September 9, 2005 by farmerdring

[El_Pirata]

Why would any house owner care?

If you have a mortgage; high inflation AND low interest rates is the best present any chancellor could give you, short of paying the mortage himself.

<{POST_SNAPBACK}>

The trouble for the home-owner with this situation is that, although the interest rate on your mortgage stays low, your other important outgoings start to spiral out of control. Petrol prices, gas prices, council tax, even food is getting pricier. But your wage does not follow suit, because inflation is "officially" 2.3 or whatever.

Don't forget that higher wage rises do not necessarily result from higher inflation, they often lag. I've seen this myself in the last few years in Argentina. In fact governments will often try to hold them down in a misguided attempt to counter inflation. This really hammers the poor.

I believe this has happened here too through immigration, Mervyn King himself has said that immigration has kept wages down i.e. it has stopped the increased money supply (arising from low interest rates) feeding through into pay packets as workers has no bargaining power. Instead that increased money supply has been directed into asset prices eg houses, and has then been feeding into the economy as a whole through debt - credit cards, MEWing etc.

Just my theory anyway, I'm only an amateur but enthusiastic economist.

[AgeingBabyBoomer]

I found Abelard's definition to be most comprehensible, and reasonable on the global scale:

http://www.abelard.org/inflation.htm

Basically the difference between what a nation produces, and how much money it prints.

More stuff made, prices go down, more money printed prices go up....

(or rather purchasing power goes down)

ABB

Edited September 9, 2005 by AgeingBabyBoomer

[Guest horace]

I am going to ask a very silly question.

I have attempted to apply simple logic but I`m afraid my feeble brain is simply not capable of reaching a conclusion so let me pose the question for you.

Inflation erodes debt. Does anyone disagree?

Thus, if the `inflation rate` used by HMG is generally perceivced to be higher (as an example) than the rate published by HMG is debt eroded?

horace.

[El_Pirata]

i didn't quite follow what you meant here?

petrol has gotten expensive very quickly and has certainly shown up in the huge cpi rise.

you have to interpret cpi for what it is though and not just say oh inflation is 2.3% and complain about it. petrol feeds into everything and so everything gets more expensive but this shouldn't be confused with inflation.

as for the strawberries, you are right. cpi isn't perfect, i didn't say it was. but, we don't buy that many strawberries and so it presumably gets a smaller weight in comparison to apples.

EDIT further, petrol is about 93p (so similar to 2000 adjusted for inflation) and guess what, 14th september has been penciled in as strike action day by the same organisers.

<{POST_SNAPBACK}>

I would argue that a lot of the strength of the oil markets is a symptom of increased money supply globally and therefore devaluing of currency in the last few years. The market is reaching and reaching for a level that will start to cut demand, because the global production and refining capacity is too tight, but it is not finding that level. Through my work I am in contact with suppliers to service stations throughout Europe, and demand is just not falling back. $3 a gallon in the US, a remarkable level, is only just starting to cut into demand growth. That is, I believe, because there are more $$$ £££ and €€€ out there.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

The next publication date will be 13 September 2005. Waiting with interest. Wonder if NuLab stooges will be used as Price Collectors this time? Gordon Brown must be willing to try anything in his desparation to disguise the true state of the economy.

Just been reading through the basket of goods plus all the other info - brings me back to happy(un) days at University listening to Dr. S prattling on about statisitics and trying to explain minitab (is that the correct name?) .

Edited September 9, 2005 by gruffydd

[farmerdring]

I would argue that a lot of the strength of the oil markets is a symptom of increased money supply globally and therefore devaluing of currency in the last few years. The market is reaching and reaching for a level that will start to cut demand, because the global production and refining capacity is too tight, but it is not finding that level. Through my work I am in contact with suppliers to service stations throughout Europe, and demand is just not falling back. $3 a gallon in the US, a remarkable level, is only just starting to cut into demand growth. That is, I believe, because there are more $$$ £££ and €€€ out there.

<{POST_SNAPBACK}>

i bow to your inside knowledge of course as i am not involved.

but could the new demand be from the ever increasing newer markets? this certainly puts more $$$$ into the equation.

[OnlyMe]

I would argue that a lot of the strength of the oil markets is a symptom of increased money supply globally and therefore devaluing of currency in the last few years. The market is reaching and reaching for a level that will start to cut demand, because the global production and refining capacity is too tight, but it is not finding that level. Through my work I am in contact with suppliers to service stations throughout Europe, and demand is just not falling back. $3 a gallon in the US, a remarkable level, is only just starting to cut into demand growth. That is, I believe, because there are more $$$ £££ and €€€ out there.

<{POST_SNAPBACK}>

Yep, this is turning into a crisis of the central banker's own making.

They can print money but they do no work and produce NOTHING, they cannot generate wealth and this action is only creating distortions and destroying competitiveness - all round a pi$$ poor policy.

Wait for the first lender to go phut.

Edit - trade deficit worsening again (despite the misleading the misleading "flat" bit), no surprise there then.

Britain's global trade gap widens

http://news.bbc.co.uk/1/hi/business/4228964.stm

The overall trend for UK trading looks flat

Britain's trade gap with the rest of the world grew wider in July, reversing a sharp narrowing in the previous month, official figures show.

Edited September 9, 2005 by OnlyMe

[zorn]

Most of us here are in agreement that the CPI as a measure of inflation is at best ineffective, at worst entirely bogus.

It conveniently excludes the most significant costs of living - housing, fuel, council tax - and seems to be composed mainly of DVD players and TVs.

<{POST_SNAPBACK}>

CPI certainly does include fuel. It excludes taxes partly because they're not prices, and partly because people like you would accuse the government of all kinds of skulduggery if, for example, they increased tax credits to poor people and CPI fell as a result. It doesn't include housing mostly because it was felt to be counter-productive if when you put up interest rates to control inflation, it caused an immediate increase in the official inflation rate.

And for your information, category 9.1 (audio-visual, photo and data processing equipment) is currently only weighted as 2.5% of the CPI -- it hardly counts as "mainly composed" of this category.

[BuyingBear]

CPI certainly does include fuel. It excludes taxes partly because they're not prices, and partly because people like you would accuse the government of all kinds of skulduggery if, for example, they increased tax credits to poor people and CPI fell as a result.

<{POST_SNAPBACK}>

Maybe of general taxation, but council tax is no different in its impact than gas/electric/water charges, it has to be paid out of income that is already taxed. When there are "inflation busting" rises it will mean cut backs in other areas, unless you were lucky enough to receive a 20% wage rise, you can see the obviously impact on those on fixed incomes.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

"Last week you may have seen the revision to the basket of goods used to measure our inflation rate...........I actually find the Consumer Price Index (CPI) to be rather misleading and I believe it ignores some of the true and underlying inflationary pressures that we all have to endure.

"Council Tax is also excluded, which has been specifically altered by increased government subsidy this year; this will have a far greater impact when the property price bands are revalued later in 2005. These are important inflationary pressures which the CPI chooses to ignore.

"As for the new measures of inflation, I find the inclusion of Botox and live hamsters to be somewhat at odds with the contents of my own shopping basket - but perhaps I am just ageing too fast"

extracts from J Urquhart Stewart article (03/05)

[anto]

Pardon my naivety, but what place do consumer electronics have in a CPI? DVD players and flat screen TVs get cheaper every quarter as more units are sold and manufacturers refine their production processes. Laptops and PCs are specced to fit into fixed pricepoints - you could buy a PC for £999 ten years ago, and you still can now, and you have no way to compare the two.

Changes in the prices of these goods have little to do with the underlying value of money, and only serve to skew the data.

I reckon the price of a chocolate bar has risen at least 10% in the last 2 years, and a can of Coke seems 50% more than it was a decade ago (can you tell that I snack a lot at work) - these are mature products where price variations have nothing to do with demand surges or efficient new techniques, and so seem more representative of true value.

Thoughts, anyone?

[right_freds_dead]

Pardon my naivety, but what place do consumer electronics have in a CPI?  DVD players and flat screen TVs get cheaper every quarter as more units are sold and manufacturers refine their production processes.  Laptops and PCs are specced to fit into fixed pricepoints - you could buy a PC for £999 ten years ago, and you still can now, and you have no way to compare the two.

Changes in the prices of these goods have little to do with the underlying value of money, and only serve to skew the data.

I reckon the price of a chocolate bar has risen at least 10% in the last 2 years, and a can of Coke seems 50% more than it was a decade ago (can you tell that I snack a lot at work) - these are mature products where price variations have nothing to do with demand surges or efficient new techniques, and so seem more representative of true value.

Thoughts, anyone?

<{POST_SNAPBACK}>

you cant clearly indentify inflation from any one particular product. in any product the price is also dependent on consumer appeal and fashions. if they can get away with planting the mindset that a can of coke is in fact worth £1 they will charge it, rather than raise the cost per year in line with current rates. they will try to convince you of its value by association with football and/or pizza hut.

things which supply manufacturing are good indicators of real inflation. these are block dynamic and cause the overall rises. raw materials and fuels during manufacture are ideal indicators.

[BuyingBear]

Pardon my naivety, but what place do consumer electronics have in a CPI?  DVD players and flat screen TVs get cheaper every quarter as more units are sold and manufacturers refine their production processes.  Laptops and PCs are specced to fit into fixed pricepoints - you could buy a PC for £999 ten years ago, and you still can now, and you have no way to compare the two.

<{POST_SNAPBACK}>

Things get interesting with electronics and cars, this applies to all sectors but it's most striking in those areas, say a 3.0GHz PC sells for £500 and a 3.5GHz version comes out as a direct replacement at the same cost, you would think the price is static, non? Well, this is actually reported as deflation, they take the former price of the 3.5GHz unit and deflate that down, so PC's may have deflated 15% over a few months yet the price you pay would still be £500.

Same applies to cars, the price can even go up slightly but if the new range now includes air-con, sat-nav as standard for example then this is counted as deflation, even though the actual sale price may be higher they factor in the extra kit that is now installed by default.

Lots of interesting things happen with weightings and hedonic adjustments, if any component rises in price significantly it drops down the index, it automatically takes up a lesser proportion. This is done as a crude sort of supply and demand mechanism, as something rises in cost then demand should drop off, in theory. In the real world if you have to drive 20 miles to and from work each day and fuel prices go up 25% they now assume you only have to travel 15 miles

A recent CPI report (June, I believe) in the US actually reported fuel costs falling 6% YoY, that's due to these adjustments. I suppose they assume if prices rise too much you will just sit there and freeze to death in the winter.

They can make figures mean anything, the problem is trying to get the real world to reflect your model, many statisticians see it that way round.

"There are lies, damned lies, and statistics" as they say.

Edited September 10, 2005 by BuyingBear