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Mr_Sminty

Inflation Measures Rpi Vs Cpi

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Been reading a lot about how the change to a CPI measure is overstating inflation and hence will prevent a rate cut, just when we apparently need it. CPI doesnt take mortgage payments into account so my question is, if we had stuck to RPI would the house price bubble have been prevented or lessened due to the fact that mortgage inflation and hence HPI would have been factored in and hence rates would not have been chopped so much thus fueling the property/consumer spending boom through cheap money?

Why was it changed in the first place?

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Been reading a lot about how the change to a CPI measure is overstating inflation and hence will prevent a rate cut, just when we apparently need it. CPI doesnt take mortgage payments into account so my question is, if we had stuck to RPI would the house price bubble have been prevented or lessened due to the fact that mortgage inflation and hence HPI would have been factored in and hence rates would not have been chopped so much thus fueling the property/consumer spending boom through cheap money?

Why was it changed in the first place?

RPI suddenly being under CPI is a falicy.

People forget that the RPI measure which has sttod us in very good stead for over 40 years, was changed with massively significance in Febuary 2005.

The high value added goods in the RPI - i.e. those goods which continually improve thier quality to capture market share while thier price remains the same, like computers, DVDs, mobile phones etc.. now all magically fall in price as the quality improvement is 'rebased'. This change has had a massive effect on the weighting and representation of the RPI measure.

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It was changed in the first place so we were theoretically closer to the European model for measuring inflation (so we could join the Euro) and also to facilitate a drop in IRs to stave off recession.

Without changing to this measure, we would have had a mild recession along with the rest of the world which we would now be coming through.

My belief is that if we had stuck to the old measure, house prices would have grown at a more usual pace and the country would not have been massively in debt. The one thing which would really have driven the inflation rate up by the old measure would have been house prices. In fact the rate hit 3.3% against a target of 2.5% some time ago. Of course now house prices are falling and the RPI is falling with it, some people want to change the rules and go back to the other measure, completely forgetting that IRs would probably be back at 6% by now.

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My belief is that if we had stuck to the old measure, house prices would have grown at a more usual pace and the country would not have been massively in debt. The one thing which would really have driven the inflation rate up by the old measure would have been house prices. In fact the rate hit 3.3% against a target of 2.5% some time ago. Of course now house prices are falling and the RPI is falling with it, some people want to change the rules and go back to the other measure, completely forgetting that IRs would probably be back at 6% by now.

But 2.5% was only the midpoint of the old RPIX target range of 1.5%-3.5%, so in fact RPIX never went outside its target range and interest rates could have done exactly the same without breaching any targets. It would have made no, or very little, difference.

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interest rate rises would (should) have happened much earlier - in theory the MPC should have seen a risk to the upside when house prices started to rise and sould have taken pre-emptive action - as it was, they probably saw what was going to happen but as hps were not impacting ther measure they were under no obligation to do anything

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  • 302 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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