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King: "cpi Figures Wrong During Boom"

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King lifts lid on inflation error

Forgive me if this was ointed out yesterday. Certainly wasn't on the MSM.

Thursday, 17th February 2011

UK ECONOMY

JULIAN HARRIS

Inflation was higher than official figures suggested throughout the housing bubble and credit boom, the Bank of England admitted yesterday.

Consumer price inflation was 0.3 per cent higher than previously thought every year between 1997 and 2009, due to errors on clothing prices.

Sales prices were wrongly assumed to be the norm, distorting the Office for National Statistics’ numbers. The blunder was bound to have misled the Bank, economists said, and meant that interest rates were kept too low for too long during the boom.

“If the ONS had got its figures right, the Bank might have moved more quickly to raise rates and get us out of the cheap-money spiral that caused the housing and borrowing bubble, and the inevitable bust that followed,” said Eamonn Butler of the Adam Smith Institute think tank.

“At the same time it has cheated pensioners and others on fixed incomes and budgets linked to inflation,” he commented yesterday, after the Bank published its latest Inflation Report.

The error, revealed in the Bank’s Inflation Report, had an even greater effect on the retail prices index (RPI) inflation, driving up the wedge between RPI and CPI by an additional 0.3 per cent.

Yet Bank governor Mervyn King was notably more dovish over future inflation threats than had been expected, causing investors to ease their expectations of a rise in bank rate.

...

Inflation in two years time is still “more likely to be above the target” rate of two per cent, if interest rates and the level of asset holdings were to remain at their current rates, the Bank said yesterday.

So, according to the RPI underestimate (0.6%) prices are an additional 7.4% higher than they are supposed to be. In other words, if you thought you were worth £1,000,000, the bad news is you are £74,500 poorer. Have a nice day!

Edited by Sledgehead

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Awwww poor little Mervy-wervy, "misled" by inaccurate CPI figures... it's not his fault the biggest boom in UK history was left unchecked, oh no. It's those naughty number crunchers at the ONS. <_<

What a crock of shit.

Edited by What's'isname

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Awwww poor little Mervy-wervy, "misled" by inaccurate CPI figures... it's not his fault the biggest boom in UK history was left unchecked, oh no. It's those naughty number crunchers at the ONS. <_<

What a crock of shit.

Normally if somebody chronically overcharges you (let's say for instance the banks with their charges), you can get a rebate. Do you think it's worth applying?

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So, according to the RPI underestimate (0.6%) prices are an additional 7.4% higher than they are supposed to be. In other words, if you thought you were worth £1,000,000, the bad news is you are £74,500 poorer. Have a nice day!

Which also means people's real wages have fallen more than they thought, and real house prices are higher than they actually are.

Bleedin' obvious really. I'm surpised he didn't say 3% p.a.

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So they underestimated inflation for over a decade..... all because they didn't know there was a sale on at Dorothy Perkins.

What would the inflation numbers have been if they'd included house prices?

What a bunch of total muppets.

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this is a crock of shit excuse by merv. Such an error would have a one time effect in the first year it is applied only. Once the sales price is being used the sales price will inflate at the same rate as inflation.

ie clothes price should be £10, £7 is used instead by error - big error in this year. The next year the sales price is now £7.20 (giving roughly the correct inflation figure)

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??? or if they knew that the inflation was 0.3% higher before due to someone eles mistake, they would have increaste the rate higher earier.

Where as we are 2% higher than the target rate should keep the rate the same. Can anyone explan to me??? I am really lost.....

and BTW, the target for BOE setting is to ensure the banker to get an increase bonus of 10% per year, it is nothing to do with the inflation.

That is why we have QE last year as they had a lost in bonus, and no need of QE this year as they have 20% increase in bonus this year after a big salaly increase.

SO whatever mistake they had on the inflation figure have nothing to do to the rate setting. It is purely due to bank bonus.

Hence, I suggest that the gov make all bank bonus to reduce tax payment 10% a year by year, so that they can increase the rate as they should have done and then my saving can have a chance to beat the inflation.

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I look forward to NS&I adjusting the values on their index-linked certificates, then. As if! :angry:

Well, exactly. And what of index linked gilts? Is there not a contractual agreement implicit in these that will force the government to pay out the difference?

Edited by Sledgehead

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The under reported cost of a bunch of sale rags blindsighted my to the issue of burying the population unter a trillion pounds pf personal debt + god knows what in banksters and govt debt.

Unexpectedly my respect for this spinless, incompetent little creep hits a new low almost of a daily basis.

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Hang on a mo: if the contract for index linked gilts is tight enough, holders WILL have to be compensated. Remind me again where King's pension pot is invested?

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The only constant where the BOE and inflation figures are concerned is that the figure will be whatever the BOE can get away with. CPI currently 4% ?? You can guarantee that it's actually more like 8%

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It wouldn’t have affected IL gilts or NS&I IL products, which are indexed by RPI.

The problem was with CPI. One of the reasons this was investigated by ONS was because economists were scratching their heads wondering why there was such a divergence between clothing prices in CPI vs RPI.

Edit: Scratch that - reading the BoE explanation they say it will affect RPI, and by more than CPI due to the formula effect.

Edited by FreeTrader

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King lifts lid on inflation error

Forgive me if this was ointed out yesterday. Certainly wasn't on the MSM.

Thursday, 17th February 2011

UK ECONOMY

JULIAN HARRIS

Inflation was higher than official figures suggested throughout the housing bubble and credit boom, the Bank of England admitted yesterday.

Consumer price inflation was 0.3 per cent higher than previously thought every year between 1997 and 2009, due to errors on clothing prices.

Sales prices were wrongly assumed to be the norm, distorting the Office for National Statistics' numbers. The blunder was bound to have misled the Bank, economists said, and meant that interest rates were kept too low for too long during the boom.

"If the ONS had got its figures right, the Bank might have moved more quickly to raise rates and get us out of the cheap-money spiral that caused the housing and borrowing bubble, and the inevitable bust that followed," said Eamonn Butler of the Adam Smith Institute think tank.

"At the same time it has cheated pensioners and others on fixed incomes and budgets linked to inflation," he commented yesterday, after the Bank published its latest Inflation Report.

The error, revealed in the Bank's Inflation Report, had an even greater effect on the retail prices index (RPI) inflation, driving up the wedge between RPI and CPI by an additional 0.3 per cent.

Yet Bank governor Mervyn King was notably more dovish over future inflation threats than had been expected, causing investors to ease their expectations of a rise in bank rate.

...

Inflation in two years time is still "more likely to be above the target" rate of two per cent, if interest rates and the level of asset holdings were to remain at their current rates, the Bank said yesterday.

So, according to the RPI underestimate (0.6%) prices are an additional 7.4% higher than they are supposed to be. In other words, if you thought you were worth £1,000,000, the bad news is you are £74,500 poorer. Have a nice day!

laugh.gif x infinity

fannies!!

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It wouldn’t have affected IL gilts or NS&I IL products, which are indexed by RPI.

The problem was with CPI.

think you need to read the article again.

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There has been some delay in getting these figures out?

They must have changed the system for this last year when they discovered there was an error in the data from 1997-2009.

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think you need to read the article again.

I edited my comment just after I'd posted it.

I'd like to see the ONS docs on this, because as I said, the divergence between clothing in CPI and RPI had become a real issue.

For example, from the Economist:

In December, the CPI recorded inflation of 2.1% for clothing, whereas the RPI reported 10.3% for clothing and footwear (the latter rising by only 3.2%)

Edit: Sledge, I see now. It was the ONS change in clothing measurement that has caused the large divergence, due to the formula effect.

Edited by FreeTrader

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As clothes were mostly imported from abroad, I doubt that an interest rate rise would have helped anyway. If we had hiked up rates further, more foreign money may have reached our shores, potentially pushing up property prices further (read: more 100%+ mortgages). That is even if it had an effect at all - if long term borrowing was so cheap, would overnight interest rates have made much of a difference anyway?

I also doubt that a (potentially) stronger pound would have helped our exports either, which were already suffering at the hands of the housing bubble and foreign money.

I really struggle to see why using price indexes to set interest rates is a good idea. They can be blown around due to external factors, yet we are lead to believe that changing the cost of borrowing can affect this.

Would it not be better to have a twin target of narrow money per capita and broad money per capita (or some such)? The growth of the latter would be a good indication of whether the economy is overheating (ie. fast increase in borrowing) or not. The former should surely just be adjusted as the population changes too. We could then ignore external factors in terms of monetary policy, leaving the government with the job of smoothing over fluctuations as required*.

* Such as the fuel tax, depending on petrol price concept. Alternatively, they could just let people adapt to the price changes, as trying to combat them appears to be futile at best and damaging it worse.

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Inflation and money supply were wildely different in those years because most of it was locked up in the housing merry go round which gordon decided shouldnt count towards inflation.

Why cant they admit this?

Clothes? Sure, theyre the reason we're in the mess we are.

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If you go to the full stats page for RPI - you will see a few asterix at the bottom for small errors here and there. If this is added (And I cannot see how it will not be) it is on a totally different level to anything that has ever gone before.

Monumental ****** up. I may be sending a query re. my index linkers.

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Inflation and money supply were wildely different in those years because most of it was locked up in the housing merry go round which gordon decided shouldnt count towards inflation.

Why cant they admit this?

Clothes? Sure, theyre the reason we're in the mess we are.

Agreed - they should pin this cr*p on Gordon and his crew. The BoE was just following their bad orders, corrupted data or not.

It was good to see Faisal Islam pretty much nail it on CH4 news yesterday. To paraphrase, he suggested that the index should be abandoned, as it hasn't work since Gordon Brown introduced it, either in the boom or the bust. He also hit the mark when saying a rate rise would cost businesses, only in the hope that it would strengthen Sterling (and therefore decrease import prices). Not only would the latter seem unlikely if the former occurs, but it would also kill off any chance of an export lead recovery.

I think the BoE needs to advise the government over what the targets should be and the government needs to take a good think about whether just adding in housing costs again is going to be enough. Shouldn't we be getting right down to the detail of what the BoE can and can't control and what it should and shouldn't be trying to control?

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I wonder if pensioners etc could sue for back payment of pensions?

Good god, I overlooked the linking explicit in the state pension.

Add that to this:

Looking just at the gilts currently in issue (obviously some will have matured so increase the liability, whilst some recently in issuance will not have be affected), the DMO states that their nominal value, which accounts for inflation under the flawed RPI, is : ~£232bn

So, adjusting at a rate og 0.6% for 12 years, gives a corrected nominal value of : ~£249.5bn

This means the government (ie the taxpayer) would, under these assumptions of quantum, be obliged to find an extra 249.5 - 232 = ~£17.5bn to redeem these gilts.

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