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exiges

Some Inflation Figures

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Retail price index (all items) RP02:

Jan 2009 210.1

Dec 2010 228.4

Price inflation = + 8.7% (v.a.t. increase yet to be added)

Average weekly earnings private sector (not seasonally adjusted):

Jan 2009 Average weekly earnings = £445

Nov 2010 Average weekly earnings = £433 (provisional)

Increase = – 2.7%

Average weekly earnings public sector (not seasonally adjusted):

Jan 2009 Average weekly earnings = £441

Nov 2010 Average weekly earnings = £467 (provisional)

Increase = + 5.9%

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House prices down 10%--how much impact does this have overall? Job losses are cutting earnings which will also have to be factored when jobs start being shed in the tens of thousands beginning in February. My petrol costs have plummetted 50% as I have arrnaged things to cut driving 50% and my local Shell station said biz has plummetted.

Edited by Realistbear

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Luckily for us the problem is wage inflation and not food inflation.

When you see wages increase in any sector other than for the bankers please let Mystic Pr1ck know as he'll need to be vigilant and contain the problem.

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Look like the public sector are getting rid of low paid workers and keeping the managers on.

Nobody who I know in the public sector is getting anything like that amount, they are all on 0% - 2%, so it must be changing profile of employees.

Not good news for public services or the tax bill.

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Look like the public sector are getting rid of low paid workers and keeping the managers on.

Nobody who I know in the public sector is getting anything like that amount, they are all on 0% - 2%, so it must be changing profile of employees.

Not good news for public services or the tax bill.

But with proportionally so many more high-performing manager types just imagine how much productivity will increase!

If these figures in general are an accurate representation of what's going on then it looks like inflation plus no matching salary increases is more or less going to have the same finances-destroying impact on stretched individuals as interest rate increases would have had.

Still, if you were a BTL ***** with 4 or 5 houses on interest only base rate trackers the whole ZIRP/QE cluster****** will have bailed you out nicely ...

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Retail price index (all items) RP02:

Jan 2009 210.1

Dec 2010 228.4

Price inflation = + 8.7% (v.a.t. increase yet to be added)

Average weekly earnings private sector (not seasonally adjusted):

Jan 2009 Average weekly earnings = £445

Nov 2010 Average weekly earnings = £433 (provisional)

Increase = – 2.7%

Average weekly earnings public sector (not seasonally adjusted):

Jan 2009 Average weekly earnings = £441

Nov 2010 Average weekly earnings = £467 (provisional)

Increase = + 5.9%

Are you Dempster on the BBC comments?

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But with proportionally so many more high-performing manager types just imagine how much productivity will increase!

If these figures in general are an accurate representation of what's going on then it looks like inflation plus no matching salary increases is more or less going to have the same finances-destroying impact on stretched individuals as interest rate increases would have had.

Still, if you were a BTL ***** with 4 or 5 houses on interest only base rate trackers the whole ZIRP/QE cluster****** will have bailed you out nicely ...

Exactly. All monetary and fiscal policy, bailouts and liquidity schemes can do is change who pays for the screw up. The screw up was caused by lots of interwoven things but it all really boils down to the pursuit of quick profits by corporations and individuals. Encouraging inflation via ridiculously low rates and printing money means that the poor will pay the most, and those who caused the problems will pay the least.

It's ******ing crooked. It's robbery. The system needs destroying, not propping up.

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Look like the public sector are getting rid of low paid workers and keeping the managers on.

Nobody who I know in the public sector is getting anything like that amount, they are all on 0% - 2%, so it must be changing profile of employees.

Not good news for public services or the tax bill.

plus the payscales.

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plus the payscales.

Yep, my mother in law (intelligence officer at a prison) was complaining she's had no payrise in a year or two.

I asked "what about payscales ?".. ah well.. she'd had those, "but they don't count.." <_<

Edited by exiges

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Retail price index (all items) RP02:

Jan 2009 210.1

Dec 2010 228.4

Price inflation = + 8.7% (v.a.t. increase yet to be added)

Average weekly earnings private sector (not seasonally adjusted):

Jan 2009 Average weekly earnings = £445

Nov 2010 Average weekly earnings = £433 (provisional)

Increase = – 2.7%

Average weekly earnings public sector (not seasonally adjusted):

Jan 2009 Average weekly earnings = £441

Nov 2010 Average weekly earnings = £467 (provisional)

Increase = + 5.9%

Where did those figures come from?

I can believe them. If true, clear evidence that we are headed for a state default. Riots on the streets too.

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Look like the public sector are getting rid of low paid workers and keeping the managers on.

Nobody who I know in the public sector is getting anything like that amount, they are all on 0% - 2%, so it must be changing profile of employees.

Not good news for public services or the tax bill.

Those figures were over 2 years.

And don't most public sector workers get an automatic annual seniority increment? Include (increment + 0-2%) over each of two years and what do you get?

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Those figures were over 2 years.

And don't most public sector workers get an automatic annual seniority increment? Include (increment + 0-2%) over each of two years and what do you get?

Pay scale increments in Local Authorties have not been affected by the freeze on public sector pay. The jump is around £800 pa. It generally takes 4 years for an employee to reach the top of scale.

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Pay scale increments in Local Authorties have not been affected by the freeze on public sector pay. The jump is around £800 pa. It generally takes 4 years for an employee to reach the top of scale.

Here are Police payscales

http://www.police-information.co.uk/policepay.htm#constables

note, a person starts on x....the payscale moves up with any rises.

so on year 2, the person gets whatever rise is available...for some it was 0%, then also jumps to the next year....

for example a constable starts in Sept 09 on £22,680

in Sept 10, he sees a rise to £25,962

£3300 more pay.....whats that...about 15%

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Here are Police payscales

http://www.police-information.co.uk/policepay.htm#constables

note, a person starts on x....the payscale moves up with any rises.

so on year 2, the person gets whatever rise is available...for some it was 0%, then also jumps to the next year....

for example a constable starts in Sept 09 on £22,680

in Sept 10, he sees a rise to £25,962

£3300 more pay.....whats that...about 15%

I can't speak for the Police, but IMO £22k pa is low considering the job they do.

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I can't speak for the Police, but IMO £22k pa is low considering the job they do.

they get overtime and other perks.

The Met gets much more than this.

dont forget, that half way through probation they are on average salary base.

not bad for a 20 year old.

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they get overtime and other perks.

The Met gets much more than this.

dont forget, that half way through probation they are on average salary base.

not bad for a 20 year old.

Fair point, overtime however is now very much restricted and has to be pre authorised.

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I know this is from the US but it's a unusually good analysis:

http://www.businessinsider.com/inflation-is-so-much-worse-than-were-told-it-is-2011-1

Inflation is actually much higher than what the BLS claims it is; something that purchasers of college tuition, pharmaceuticals, or health insurance know all too well.

To give the BLS some credit, they must try and estimate a single rate of inflation that applies to everyone equally. But that is a completely impossible task. An octogenarian living in Seattle on a meager pension and taking lots of prescription medications will have a totally different inflation experience than an 18 year old living in their parent's basement eating Ramen noodles.

But even after spotting the BLS some slack, there are some enormous and glaring errors in their methods that render the official inflation measure hopelessly - and dangerously - inaccurate.

In this article, I am going to reveal how US inflation numbers are badly understated, how this practice short-changes institutions and fixed-income individuals alike, and why this means fiscal and inflationary train-wrecks are the most probable outcome for the US -- and, by extension, the globe.

Why This is Important

As a refresher, inflation in the US is calculated by the Bureau of Labor Statistics (BLS) in a measure called the Consumer Price Index, or CPI. It is used by the Federal Reserve to justify its money printing policies, by the federal government to calculate cost-of-living adjustments (COLA) for the entitlement programs (e.g., Social Security), and to set the interest rate on inflation-adjusted bonds known as TIPS. Indirectly, the CPI influences interest rates, the stock market, and a host of salary and pension negotiations each year. If the CPI is too low, even by a single percent, the impact is in hundreds of billions of dollars.

And from a financial planning standpoint, the impact is just as dire. If you are putting away money for a child for college, the rate of inflation you apply to the tuition has an enormous impact on the amounts you'd need to put away. In eighteen years, a current $40,000/yr tuition will become $66,000/yr at a 3% rate of inflation, but $107,000/yr at a 6% rate of inflation. The same logic and results apply to retirement planning.

Further, the cost estimates surrounding the current health-care debate in the US are founded on inflation projections that draw upon prior CPI readings for their baselines.

It is vitally important that our assessment of inflation be as accurate as possible.

Unfortunately, the CPI understates inflation, which is much higher (worse) than we're told.

Understanding exactly how this is accomplished will help clear your mind and lead to more certainty in your decisions.

Caveat Emptor

Every country fights its last battle, and in the US, unlike Europe, the prior enemy was deflation, which ravaged the land in the 1930's.

Seeking to avoid that fate repeating itself, the US Federal Reserve routinely justifies the continuation of its massive money printing experiment (which goes by the all-too-fancy title "Quantitative Easing") by citing an apparently low rate of inflation, as provided by the BLS.

Here's a recent example of such justification at work:

Recent data show consumer price inflation continuing to trend downward
. For the 12 months ending in November (…) inflation excluding the relatively volatile food and energy components--which tends to be a better gauge of underlying inflation trends--
was only 0.8 percent
, down from 1.7 percent a year earlier and from about 2-1/2 percent in 2007, the year before the recession began.

A 0.8% yearly rate of inflation (ex food and energy, of course) that is trending downwards certainly makes inflation sound like a non-issue and supports the idea of dangerous deflation lurking nearby.

Indeed, the Fed is right, after subtracting out the items that are most responsible for keeping everybody alive and comfortable (food and energy), the rate of inflation as reported by the BLS seems to be locked in a mortal tailspin…as long as you only look at the narrow range marked by the red line below:

IISMWTWT_CPI_-_Monthly_rate_of_Change.jpg

(Source)

Well, the average person would be well within their rights to wonder what all the fuss is even about. After all, inflation is now within 0.06% of its ten-year average, and unless you are calculating the trajectory of a newly launched Mars probe, 0.06% is not really that big of a deal. But the Fed is terrified of it.

Backing up this view is the BLS, which provided us with these data for December 2010:

IISMWTWT_BLS_CPI_Claims.jpg

(Source)

According to the BLS, the average household experienced an exceedingly tame rate of inflation of only 1.5% between December 2009 and December 2010. That is, what used to take $100 to buy in 2009 requires $101.50 in 2010; only a dollar-fifty more. Once we strip out food and energy, the cost index plummets, requiring only 80 cents more than a year ago to buy the same basket of goods and services.

The only problem with this view is that it is utterly, provably, and demonstrably wrong.

I can reveal how with one relatively simple example.

[Note to any journalists reading this. My standing offer to you is this: I will spend as much time as you wish going through this data if you feel that understanding it more completely will help your current or future reporting on the issue.]

Health Insurance and the CPI

As I mentioned in the Crash Course chapter on inflation, there are three major statistical 'tricks' that the BLS imposes on the Consumer Price Index. They are hedonics, which tries to account for improving quality in products over time, substitution, which is the act of switching to lower-cost items when prices surge on preferred items, and weighting.

For less-than satisfactory reasons, the BLS only weights healthcare at 6.5% of the CPI, although it represents 17.6% of the total GDP. That's a big problem, because healthcare is the biggest and most consistent source of inflation over the years.

A big portion of the underweighting of medical care can be attributed to a single category: health insurance, which stands at just 0.49% of the total CPI reading, or less than half a percent:

IISMWTWT_1-6-2011_3-16-05_PMCPI_HC_WEighting.jpg

(Source)

According to the BLS, the average family is projected to have a total exposure to rising health insurance premiums at a rate of only 0.49% (out of 100%). Given a median family income of $49,077 (the 2009 value), this means that the BLS assumes that the average family contributes just $239 dollars per year towards their healthcare insurance premiums. Yes, I wrote per year, not per month. That's not a typo.

Worse, and compounding this error of weighting, the BLS has somehow calculated that the cost of health insurance has been steadily falling for the past three years:

IISMWTWT_CPI_Health_Insurance_Price_Index.jpg

(Source)

Apparently health insurance rose from 2005 to 2007 and has been in a sustained downtrend ever since. By this measure health insurance is now just 4% higher than it was in 2005, a full five years ago.

In the full report on this subject I go through the supporting data that reveals just how egregiously off the mark this BLS data set is (the gap is well over 100%), but I hope that everyone knows just how wrong this data has to be without much more evidence.

In just those two errors, underweighting healthcare and inexplicably concluding that health insurance has been steadily falling for three years, by my calculations the BLS is understating inflation by a full three percent.

If three percent does not strike you as a lot, go back and re-read the example about college tuition I provided in the sixth paragraph of this article.

Conclusion

For the reasons above, inflation is much higher than proclaimed. Yet we are being told, on a near-daily basis, that the massive money printing and deficit spending activities of the Federal Reserve and federal government, respectively, are not stoking inflation. At least, 'not yet.' Since the Fed uses the CPI as a key indicator in its decision making, the big risk here is that Bernanke will not begin to turn the wheel on the monetary supertanker until after it is too late.

Anybody engaging in any form of long-term financial planning - be they individuals, pension trustees, or budget setters - needs to be aware of the flaws and limitations of the official US inflation measure.

All COLA increases based on the CPI are too low. Any health care policy analyses that rely on the CPI (which is most) will vastly underestimate the true costs and are doomed to trap the nation in a regime of rapidly rising costs and deficits.

We are risking much by systematically understating inflation including our reputation, market confidence, and even the dollar itself.

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  • 312 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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