Inflation Calcs

[Prude]

Is anyone an expert on the inflation figures? Just that it seems to me that many things are rising at above the supposed rate of inflation..

ie. fuel, electric, gas, water, train fares, council tax etc.. Some of these are even double digit rises.

However it is not as easy to come up with a list of counterbalancing necessary items that produce a 2.5%ish figure overall.

Just what is going down in price then?

What weighting is given to the unavoidable bills of life as opposed to optional items of clothing for example?

Is the calculation truly representative of cost of living changes for normal households?

[CrashConnoisseur]

CPI = Chinese Pants Index.

[zorn]

Is anyone an expert on the inflation figures? Just that it seems to me that many things are rising at above the supposed rate of inflation..

ie. fuel, electric, gas, water, train fares, council tax etc.. Some of these are even double digit rises.

However it is not as easy to come up with a list of counterbalancing necessary items that produce a 2.5%ish figure overall.

Just what is going down in price then?

What weighting is given to the unavoidable bills of life as opposed to optional items of clothing for example?

Is the calculation truly representative of cost of living changes for normal households?

Council tax isn't included in the inflation figures, as it's a tax not a purchase.

Check here: http://www.statistics.gov.uk/downloads/the...PI_Oct_2005.pdf

Items whose annual inflation rate in October 2005 was less than the overall figure of 2.3% include:

Food & non-alcoholic beverages (+1.5%)

Alcoholic beverages (+1.9%)

Clothing & footwear (-5.4%)

Furniture, household equipment & maintenance (-0.2%)

Communication (-1.6%)

Recreation and culture (-1.5%)

Sub-categories with particularly big falls are:

Garments (-5.6%)

Footwear (-5.4%)

Household textiles (-5.2%)

Passenger transport by sea (-7.6%)

TV/hifi (-16.5%)

Photographic equipment etc. (-21.8%)

Computers (-18.8%)

Sporting equipment (-6.4%)

So yes, apart from the low inflation in food and drink, it's mainly cheap manufactured goods that are keeping the inflation rate down.

Overall, it's pretty representative, but it's based on what people actually do spend, not on what they have to spend.

[rhino]

"Council tax isn't included in the inflation figures, as it's a tax not a purchase."

That's funny! When I get my Council Tax bill, it provides details of the services purchased - and of how much more expensive they seem to get each year!

[zorn]

"Council tax isn't included in the inflation figures, as it's a tax not a purchase."

That's funny! When I get my Council Tax bill, it provides details of the services purchased - and of how much more expensive they seem to get each year!

Details of services purchased individually by you, as opposed to collectively by your local council? I'd be surprised. You can tell it's not a purchase because the amount you pay is based (loosely) on what you can afford to pay, not on the services you actually use.

[FreeTrader]

Some of the categories that Zorn has listed as falling heavily in price are of course subject to hedonic adjustment.

I'm don't want to start a conspiracy debate on whether such adjustments are used to manipulate the CPI numbers, but I think it's worth mentioning what I see as an effect of hedonic adjustment which can lead to many of us experiencing an apparent squeeze on disposable income.

First, let's consider hedonics as applied to computers, using an example provided by the ONS itself.

PC_Hedonics_Regression

They give an example of a PC priced £625 in January which is no longer available in February, with the nearest match having identical components except for a faster processor (2800Mhz vs 2000Mhz). The price of the replacement PC is £825.

Without adjustment, the PC price might look as if it has risen by 32%, so an adjustment is made for the improvement in performance that is now available. In the example given, the January price of the PC is adjusted upwards by 36.4% (you need to read the doc to see why) to give it a new base price of £852.56. This therefore means that in the CPI figures, the price of the PC has actually fallen by roughly 3.2%.

On the face of it, you can't really argue against making such an adjustment. But there's an important issue here.

There's barely a comparison between the PC I use today and the one I used 10 years ago in terms of processor speed, hard disk capacity, graphics performance etc. And yet, in utility terms, it does very much the same job. A great deal of the technical improvement has been gobbled up by a fatter operating system and fatter applications. The point is though that if you wanted to experience the CPI as officially published, you shouldn't be buying the improved PC, you should be buying a spec close to the previous one you owned.

Let me put it another way with a very simple example. Let's say the CPI consisted of only the prices of PCs and petrol. Over the year petrol prices rise by 10% and (hedonically adjusted) PCs fall by 10%. Normally you spend £1000 on petrol, and £1000 on your PC. The following year, if you've had no wage rise, you shouldn't be any worse off. However, it's unlikely that you'll go out and buy a PC for £900, because you want one which can handle the latest apps and games, and anyway, you probably can't even buy the same model you had the previous year. The likelihood is you'll still spend £1000 on your PC (this is the case with me. I find I spend roughly the same amount on a PC each time I buy one, even though prices are apparently falling at 15-20% p.a.).

So, your expenditure is now up from £2000 to £2100, but your wages are the same. Hedonics tells you that you are enjoying a better standard of living, because your PC is so much better than before, but the reality is that your life hasn't really changed. Money just seems a little tighter than before.

It's a very interesting topic, but so complex that it's never going to be discussed in the mainstream media.

[zorn]

So, your expenditure is now up from £2000 to £2100, but your wages are the same. Hedonics tells you that you are enjoying a better standard of living, because your PC is so much better than before, but the reality is that your life hasn't really changed. Money just seems a little tighter than before.

While on the other hand, time-lag in adjusting the basket means that the CPI overstates inflation. Here's another example for you.

Suppose that CDs cost £10 and DVDs cost £15, and your enjoyment from each is about the same, so you buy twice as many CDs as DVDs. The CPI reflects this in its basket, and so it weights CDs twice as heavily as DVDs. Supposing that the nominal basket contains two CDs and one DVD, then its price is £35.

Now suppose that CDs go up to £15 and DVDs come down to £10. You, of course, start to buy more DVDs and fewer CDs, so your actual cost is still £35, but the CPI records 14.3% inflation as the cost of the basket has gone up to £40.

After a while, they notice the change in spending patterns and reweight and rebase the basket, so that DVDs are more highly weighted and CDs are less weighted. But it's rebased at the £40 level, it doesn't go back down to £35.

Then CDs go back down to £10 and DVDs go back up to £15. You change your spending pattern back to buy more CDs and fewer DVDs, so you're exactly back where you started. But the CPI basket has gone up again, by another 14.2%, so the net effect on the CPI is an inflation rate of 30.6%, despite the fact that nothing has actually changed at all.

[OnlyMe]

Zorn,

I think you have the calculation back to front.

Goods join the index supposedly when they become more popular. There are two reasons the volume of purchases of a particular item rises - the product is inherently seen by people as something that they need/want and/or their falling price allows more people to buy the goods. With increasing volume comes economies of scale and reduced prices. It is when goods hit mass market price that they are introduced into the index and it is at this point that manufacturers cane further drop prices. If/when interest falls off the product is either no longer competitive or its price is such that those who wanted to buy alrady have, interest dies off and the product is pulled form the index.

Jeff - "Chinese Pants Index" - best one yet!