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brainclamp

The Inflation Lie

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State bets the house in big lie on inflation 08/02/2006

Irish Independent

Do our inflation figures reflect the cost of living? If the true rate of inflation is much higher than official figures state, then any wage increase secured by this week's partnership talks will not make you feel much richer.

An obvious conundrum in Irish economics is the fact that the rate of recorded inflation - the cost of living which determines your wages - seems to be very low compared to the rate at which we fork out money every week.

For example, according to government figures, average prices in Ireland have only increased in total by 12pc since 2001.

Can this be true? It certainly does not feel like it.

Yet, today's partnership talks - which will set your wages for next year - base their wage calculations on figures that say prices here rose by only 3.6pc in the past twelve months! This figure doesn't seem right and for many of us, flies in the face of common sense.

It sounds like the monetary equivalent of statements that tell us we have a "world class" health service. In the past, communist countries, such as East Germany, used to doctor official statistics, rendering them meaningless.

Are we doing the same? A reasonable way of measuring inflation in any country is by the basic yardstick of how far your cash goes in different countries.

As most of the continent uses the euro, this is a relatively simple exercise.

What happens to the buying power of your euro when you come back from holliers? Few would argue with the basic proposition that money goes farther on the continent than it does here. We get better value for money.

When you return from Spain there is a sudden devaluation of your money - despite it being the same currency. Things that cost €5 there, can often cost a tenner here.

If we are to have any faith in the statistics upon which we base our wage demands, we would expect that this disparity in prices and value would be captured in government inflation figures.

Given that things are cheaper in Spain, inflation must be much lower there than in Ireland - which would explain why everything is cheaper in Barcelona than Dublin. (It might be cold comfort after you have paid close to a fiver for a coffee at Dublin Airport, but at least you have the psychological pleasure of knowing that the official statistics feel your pain.)

But according to EU statistics, our prices are actually falling relative to those in Spain. Most of us suspect that this is nonsense and, even more ludicrous, is the fact that official statisticians claim that Irish prices have been falling relative to Spanish prices every year since 2001.

We have all heard the expression, "lies, damn lies, and statistics" and with respect to the cost of living in Ireland, this is apt. The major question is whether we are being sold an expensive pup by the Government, the trade unions and the employers' representatives?

Before we arrive at any conclusion, we should look at the rest of our EU partners lest for some reason Spain is just quirky. But here again, after examining the figures, we get no satisfaction.

For the past five years, official figures claim that the cost of living here is hovering around the EU average. So our official statistics agency contends that we are no more expensive than the European average.

Yet Ireland has, over the same period, also become the second most expensive country in the Union. Last week, figures showed that Dublin had jumped from eighth to third most expensive city in the Eurozone - a jump of six places in five years.

This does not make sense. One of these statements has to be false. Either, our inflation rate is the same as other countries as the official data suggest, in which case Ireland could not become more expensive or, our inflation figures are a myth.

Worse still, an expensive myth because it is leading us into a poverty trap.

Poverty trap? In the most dynamic economy in Europe? Surely this language is inflammatory? Well not really.

If our inflation figures are not capturing the real cost of living, if they are telling us one thing but our daily experience is screaming out another, then pay rates based on any such measurement are meaningless.

In addition, dubious inflation figures might explain why thousands of Irish people in good jobs - the working middle classes who are told that they never had it so good - feel broke.

When you consider what is the single biggest cost in Ireland - the answer is always house prices. As this paper pointed out last week, Dublin house prices are rising by €230 per day.

But it might come as a surprise to you that the inflation rates that the Government is using to measure the Irish cost of living do not include the price of houses.

So the one overwhelming price that dominates is actually omitted from official price figures. The price of houses, more than any other price, is the benchmark against which many of us gauge whether we are doing well or not.

In addition, as close to 80pc of all the money we borrowed last month was gobbled up in property, it dictates our consumption patterns.

If house prices, more than any other, dominate our common sense view of the cost of living, surely house prices should be factored into any wage deal? If not, we are living in two parallel universes: one is the "virtual" world constructed by the Central Statistics Office and used in partnership talks; the other the "real" world where we all live.

The virtual world does not include house prices to calculate inflation.

Instead, mortgage rates - based on the rate of interest - are included.

This has led to an utterly Kafkaesque development over the past few years whereby, in the real world, the price of houses has sky-rocketed, yet the cost of housing as measured by the "virtual" world's rate of inflation, has been actually falling because interest rates have been falling.

This has implied ever lower wages being negotiated for us by "Partnership" relative to the real cost of living. In the process, this is increasing the sense of impoverishment of working people.

The upshot of this carry-on is that while average house prices in Dublin rose by an extraordinary €230 per day last year, average wages rose by €5 a day - before tax.

And the authorities are trying to tell us that wages are running ahead of the cost of living! But if we are falling behind, why has the system not ground to a halt? Well, this is because the vacuum between wages and the cost of living has been filled by borrowing.

The yawning gap between take home pay and after-tax spending has been plugged by overdrafts, re-financings, hire-purchases, term-loans and credit cards to the tune of 140pc of GDP.

So at a stroke, the State has mortgaged the future to sustain the present illusion with the help of cheap credit. One way of rectifying this and clarifying the financial picture would be to include house prices rather than mortgage rates into the inflation figure. This would, sensibly, reveal that inflation is considerably higher here than the official figures suggest.

A further measure, if the Government were really worried about the welfare of the electorate, might be to index wage increases to house prices. The higher house prices, the higher the wages.

Thus the past few years of double digit house price increases would ratchet up wages to compensate. But this has not happened.

Why? Ask yourself why our State does so little to prevent the price of houses rising? Why does it do so little to protect our one million or so adult citizens under the age of 29 who are being squeezed by high rents and impossible prices?

Why does the State preside over the massive transfer of wealth from young renters to old landlords? Why does the State - through constructs like "Partnership" - reward old home owners over young houses hunters? Why is it sacrificing the under thirties - the very generation who will drive the country forward - on the altar of property developers' profits?

The reason is simple: those who run the country realise that credit is the safety valve, allowing them to reconcile the competing interests of keeping the electorate docile, while keeping the very powerful sweet.

By telling people the truth about inflation, they would blow apart a cosy consensus which has kept them in power for years.

As long as people are prepared to get into debt for ludicrously expensive houses, the State can hide its incompetence and dress it up as a product of economic success - which it is not. If we told the truth and indexed inflation and wages to house price increases, the whole deck of cards would come falling down.

Irish wages would rise commensurate with the real cost of living. This would eventually force unemployment upwards as the country became uncompetitive.

Ultimately, the Government would be voted out. But political expedience governs the day.

Instead of facing up to the political reality and the social cost of rampant house price inflation, the Government has opted to hide behind phony figures and opt for the palatable alternative of personal debt.

In conclusion, house price indexation is not going to happen. We will get into debt instead. State responsibility has been abdicated entirely. The upshot is that the Government will stay in power, the charade will continue.

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The meaning of inflation has changed in dictionaries of the last 20 years this website gives you an example of how it has changed.

http://inflationdata.com/Inflation/Articles/Definitions.asp

.Webster's 1983 Definition of Inflation

According to Webster's New Universal Unabridged Dictionary published in 1983 the second definition of "inflation" after "the act of inflating or the condition of being inflated" is:

"An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.

This definition includes some of the basic economics of inflation and would seem to indicate that inflation is not defined as the increase in prices but as the increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect.

Webster's 2000 Definition of Inflation

However, The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company says:

Inflation:

2) A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

In this definition, inflation would appear to be the consequence or result (rising prices) rather than the cause.

Shifty Words

So between 1983 and 2000 the definition appears to have shifted from the cause to the result. Also note that the cause could be either an increase in money supply or a decrease in available goods and services

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In the US they have a simple formula for measuring inflation. The government sets the target and then removes any commodities that increase in price beyond that target (fuel, housing, medical costs--in other words the basic essentials of living!).

:lol::lol::lol:

The governments of the UK, IR and US should have seen the devastating effects (debt, bankruptcy, balance of payments deficits, unaffordable housing) of HPI in advance and curbed inflation by raising IR. The Greenspan legacy I am afraid.

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Good find Brainclamp. That's a great article.

With the Irish general election coming next year, the housing market could become a central issue - almost to the point where the public may vote for "the party that would better protect house price wealth".

Interesting times ahead I feel.

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Good find Brainclamp. That's a great article.

With the Irish general election coming next year, the housing market could become a central issue - almost to the point where the public may vote for "the party that would better protect house price wealth".

Interesting times ahead I feel.

I agree. That didn't pull any punches. One for the people!

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Good find Brainclamp. That's a great article.

With the Irish general election coming next year, the housing market could become a central issue - almost to the point where the public may vote for "the party that would better protect house price wealth".

Interesting times ahead I feel.

How a Gov can protect House prices ?

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As I said in an ealier post, nearly everyone I know - most of whom are getting an 'inflation' pay rise only - realise they are about to be stung with a real-terms pay cut.

They are already cutting back to compensate. Bye, bye consumer-tat hollowed-out economy.

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There was something recently that I found odd about the job loss and job creation figurs coming out of Ireland - that being that whilst many jobs were being lost, quite a few were still being attracted and what made their situation different from the UK. The penny dropped, basically the EU funding has allowed the Irish to run mega low business taxation levels which has still been enough of an incentive combined with existing facilities and desptie the obvously serious inflation and cost problems building up. How long can this knife-edge situation persist though?

I think the journalist who penned this piece is absolutely right - how on earth are the younger generations going to support the growing property edifice or indeed invest themselves in business? Simply can;t see it happening myself.

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I think the journalist who penned this piece is absolutely right - how on earth are the younger generations going to support the growing property edifice or indeed invest themselves in business? Simply can;t see it happening myself.

And that's just not in Ireland. It's the same problem here in the UK.

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NL "inflation is 2%".

NL "now find me the 1000 articles that make that true".

inflation_finders "We've found the 1000 articles"

NL "what is the inflation rate"

inflation_finders "it's 2%"

NL "nice job, well done, don't forget to leave out newspapers next month because they're going up soon"

or

NL "give me 1000 random articles. what is the inflation rate."

inflation_finders "10%".

NL "no, that can't be true. you're looking at the wrong 1000 articles and the weighting is wrong"

NL "we'll announce it's 2% because of your mistakes"

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This really is a critical issue to people who save.

Real inflation?

---------------1997-------2005------%Increase

Pint of beer: £1.60 £2.50 56%

Price of a litre of unleaded petrol:£0.62 £0.81 30%

Average Council Tax : £715.00 £1,214.00 70%

Council tax is forced spending for services, education, housing benefit to rich landlords etc... - why is this not in the inflation measure? Clearly the inflation measure does not reflect the real cost of living.

What are the consequence of real costs - real price rises - being ignored?

If the money supply grows then holding debt really pays, as prices rise. A wealth transfer occurs from savers to debtors. (Eventually the falling real wages of labour mean spending on the higher arts and projects collapses as they become unaffordable).

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Brainclamp

I would be very interested to hear what you think would happen to house prices if there was mass unionisation and above-CPI wage increases. You have been calling for this consistently recently.

I believe it would simply lead to increased borrowing and further HPI. Is that what you want?

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I actually agree with Brainclamp to a certain extent - the route we are going down is titally unsustainable and devisive to the point of genrational revolution.

Thing is the central bankers and globalists think they can bugger about with peoples lives and manipulate the whole system, pay rates and perceived inflation to kingdom come to make their graphs look pretty when in reality bit by bit they are destroying any semblance of balance in the economy. In effect people are being told they are having to compete and when they try they are being shot in the back.

If they succeed in perpetuating this facade of an economic poliocy I think it will end very very badly and much worse than simply a recession and an econmic rebalancing.

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If they succeed in perpetuating this facade of an economic poliocy I think it will end very very badly and much worse than simply a recession and an econmic rebalancing.

Indeed. The issue isn't whether NuLab will be re-elected by faking inflation figures, it's whether the entire post-war economic and political system will continue in its current form, or be torn apart by the younger generation who are no longer receiving the 'free stuff' that was handed to their parents to keep them in line.

The middle class are being destroyed through 'stealth' inflation. A very risky tactic, as the middle class are the greatest source of stability in society: they have by far the most to lose from riots in the streets.

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MarkG

Yes, you could call it the defaulter generation, maxed out on debt and led down the path of bankruptcy to get out of that fix it isn't exactly a large step to do exactly the same with the growing liabilities that the gov. seems to want to lay on that generation. People will contribute if they think there is something to gain, if they perceive they have no reasonable expectation to gain they could potenitally turn round and say stuff your taxation, NI, and pension contributions, none of this is sorting out any of the problems I have and default on the lot!

Edited by OnlyMe

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Brainclamp

I would be very interested to hear what you think would happen to house prices if there was mass unionisation and above-CPI wage increases. You have been calling for this consistently recently.

I believe it would simply lead to increased borrowing and further HPI. Is that what you want?

It would simply lead to workers getting enough income to own some piece of their own country!

(Something which even Warren Buffett has been talking about recently regarding US workers.)

Is life for a young worker better or worst than 30-50 years ago? You have to conclude that in real terms its worse - housing wise, and pension wise.

Families are not being formed, key live events missed.

Why is this? In every aspect the operations of the economy have been revolutionised - in every part of the economy the operations of the economy are vastly improved, thanks to huge breakthroughs in technology, huge productivity breakthroughs have occured.

Dispite this workers now have to 'work till they drop'. They are priced out of owning a home. Income to labour as a share of the economy is near an all time low. A large part of the workforce undertake insecure/'flexible' work (lowering thier lifetime income and access to credit). Inflation has fallen - because income paid to labour has fallen. Not because of machines/capital/technology improvements.

If wages rise, interest rates will rise to prevent a double digit surge in the money supply. In fact the BOE has stated that even the first signs of higher pay will see higher interest rates. The only way workers can raise thier wages, boost thier saving rates etc.. in the face of falling real living standards is to unionise.

Perhaps you are looking forward to the future of the average workers life that the Skipton Building Society predicts - a society in which people are having kids at 50.

Edited by brainclamp

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This really is a critical issue to people who save.

Real inflation?

---------------1997-------2005------%Increase

Pint of beer: £1.60 £2.50 56%

Price of a litre of unleaded petrol:£0.62 £0.81 30%

Average Council Tax : £715.00 £1,214.00 70%

Council tax is forced spending for services, education, housing benefit to rich landlords etc... - why is this not in the inflation measure? Clearly the inflation measure does not reflect the real cost of living.

What are the consequence of real costs - real price rises - being ignored?

If the money supply grows then holding debt really pays, as prices rise. A wealth transfer occurs from savers to debtors. (Eventually the falling real wages of labour mean spending on the higher arts and projects collapses as they become unaffordable).

Well done, you've found some RPI items which have seen high inflation in recent years. However in the real world, an average person spending £5000 pa at the supermarket will find their shopping bill little changed over the last few years. In the real world, ordinary people buying ordinary clothes at Asda, Next etc will find those clothes are cheaper than 6-8 years ago. I don't but a DVD player or TV every week, but when I do, I will find it cheaper than 5 years ago.

You see, people in the real world have more items to pay for than beer, petrol and council tax.

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Well done, you've found some RPI items which have seen high inflation in recent years. However in the real world, an average person spending £5000 pa at the supermarket will find their shopping bill little changed over the last few years.

But it would still cost them 30% more in fuel to get to the supermarked, thats a huge change... Is that not cost of living??

Well done indeed.. :rolleyes:

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Well done, you've found some RPI items which have seen high inflation in recent years. However in the real world, an average person spending £5000 pa at the supermarket will find their shopping bill little changed over the last few years. In the real world, ordinary people buying ordinary clothes at Asda, Next etc will find those clothes are cheaper than 6-8 years ago. I don't but a DVD player or TV every week, but when I do, I will find it cheaper than 5 years ago.

You see, people in the real world have more items to pay for than beer, petrol and council tax.

If you only buy a dvd player once every 5 years why should it be included in monthly price index?

If you've already bought your plasma screen for £2000 how does the fact that the price is 20% cheaper in 6 months save you money?

Supermarket shopping is also a poor example. This was discussed in a thread on here last week I think.

Supermarkets know shoppers need to fill their trolley for £100. They will do everything they can to oblige.

IMHO the quality of the contents of your trolley over the last 10 years is inversely correlated to the supermarket's profits over the same period.

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Well done, you've found some RPI items which have seen high inflation in recent years. However in the real world, an average person spending £5000 pa at the supermarket will find their shopping bill little changed over the last few years. In the real world, ordinary people buying ordinary clothes at Asda, Next etc will find those clothes are cheaper than 6-8 years ago. I don't but a DVD player or TV every week, but when I do, I will find it cheaper than 5 years ago.

You see, people in the real world have more items to pay for than beer, petrol and council tax.

Average person spending £5000 at supermarket?? :o

Also will a DVD player be 50% cheaper every 5 years down the road - there will be a point where it can't get any cheaper, or will be superceeded by some other technology.

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IMHO the quality of the contents of your trolley over the last 10 years is inversely correlated to the supermarket's profits over the same period.

Yep. Even if supermarket prices haven't been increasing over the last few years (and I spend so little there that it's hard to tell), the quality certainly seems to have been decreasing in that time.

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  • 301 Brexit, House prices and Summer 2020

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      • down 5% +
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