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I watched Mervin K on TV yesterday for an hour discussing the inflation report. He dropped something in that was only mentioned for a few moments, but stuck in my mind.

The MPC targets CPI inflation. As far as I understand it, the inflation figure is given to the MPC & market by the ONS (Office of National Statistics), which as far as I can gather (leaving room for error here) is controlled by the ODPM.

The thing that Mervin mentioned & is widely known, is that there is a deflator used in the ONS figures, I guess to 'deflate' certain things in the CPI calculation.

Mervin seemed to be saying that this deflator wasn't clear & that he has tried to get to the bottom of it for some time, but as the deflator changes, it's hard to know what it will be in the future.

So my question which I know you lot will love, is whether there is a deliberate deception going on that allows the govt to control interest rates yet also to seem at arms length from it by simply controlling the CPI figure. When CPI looks high, but you don't want higher rates, use a higher deflator etc.

It seems plausible to me. Why would any govt completely let go of the leash on IR's when it would have such an impact on them at the polls?

Anyone who knows more about this deflator is welcome to wipe the floor with my post as clearly even though I've heard of it before, I haven't given it an enormous amount of thought or research.

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TTRTR,

I think you are on the right track. Not just the deflator, the selection of items too - notice how they swap in and out when products reach a certain part of their sales profile - you need to understand the dynamics of growing markets (and falling price trends) to realise what is really going on. Then you have adjustments for "quality" or "improvements" many of these are merely a mirage as no really useful advantage can be made - take computers, you can double the speed of the prcessor, 99% percent of users will not be able to double their output/use of the machine.

You can hide inflaiton but you cannot hide its effects. I've said it before but a a large proportion of the population of this and other countries is getting rapidly poorer and their living costs are rapidly oustripping their earnings increases.

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TTRTR,

You can hide inflaiton but you cannot hide its effects. I've said it before but a a large proportion of the population of this and other countries is getting rapidly poorer and their living costs are rapidly oustripping their earnings increases.

Indeed. The ONS can fiddle about with the CPI basket all they want, but the record prices on virtually EVERY commodity market tell us that inflation is rampant.

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TTRTR,

It seems plausible to me. Why would any govt completely let go of the leash on IR's when it would have such an impact on them at the polls?

If you were on control of government books, and wanted to win the next election Iam sure you could rig the books to your own advantage after all who does the goverment have to own up to? The People? no not really because what people dont understand wont hurt them.

with everything it always comes out as OnlyMe said "You can hide inflaiton but you cannot hide its effects."

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Guest Guy_Montag

I didn't hear about this general "deflator". I must say somethings are very cheap. I bought a new shirt & jeans from Tesco recently & got change from a tenner. The jeans were £3! Now if you work in the ONS & want to reduce CPI, change the LEVIs (£40) in your basket for Tesco Value (£3) loss leader. That's a drop of 92.5%. Of course that only works once for each item. After you've run out of items dropping in price, then maybe you have to introduce a deflator.

Anyway, thanks for the post, TTRTR, very interesting.

On edit: Can you remember which programme it was? It may be online somewhere.

Edited by Guy_Montag

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TTRTR

Niccolo Machiavelli (from whom I'm sure you draw some inspiration) was quoted as saying

"All politicans are liars - the best liars are the best politicians"

Disraeli said

"There are three types of lies - lies, damn lies and statistics"

We've all been there talking up the good and either ignoring or talking down the bad

Only me has got it spot on - you can't hide the effects of increasing prices my business expenses have gone up hugely

Perhaps we should do a poll to ask what people think the true rate of inflation is

CS

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I didn't hear about this general "deflator". I must say somethings are very cheap. I bought a new shirt & jeans from Tesco recently & got change from a tenner. The jeans were £3! Now if you work in the ONS & want to reduce CPI, change the LEVIs (£40) in your basket for Tesco Value (£3) loss leader. That's a drop of 92.5%. Of course that only works once for each item. After you've run out of items dropping in price, then maybe you have to introduce a deflator.

Anyway, thanks for the post, TTRTR, very interesting.

On edit: Can you remember which programme it was? It may be online somewhere.

It was yesterday on the Bloomberg channel about midway through the hour, so at about 11am yesterday. It was only mentioned for about 2 mins I believe as an answer to a reporters question on future inflation.

The gist I got was, no matter what the MPC thinks future inflation might be, the varying impact of this deflator may change things & the MPC doesn't know what the deflator will be & the ONS won't explain it properly. But that might just be my sub-concious thinking out aloud there.

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Indeed. The ONS can fiddle about with the CPI basket all they want, but the record prices on virtually EVERY commodity market tell us that inflation is rampant.

The thing with commodities is that they are just that. Other than some obvious examples (petrol!), the component of the sales value of an item that its made up of such inputs is negligible (which is why Australia is trying to change its model of digging stuff up and shipping it overseas without adding any value). The major costs of most items in the basket are labour costs, distribution costs, etc particularly services (obv).

And how's wage inflation been going? From what I've read here, the wages aren't rising fast enough to cover inflation driven increases in costs... but aren't the wages of this nation's lazy disinterested shop girls a large component of price? Mnnnnggh.

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I'm fairly interested now, because so far I've been unable to find any definition of the deflator that makes a lot of sense.

Deflators are many and varied according to Roger Bootle from this Telegraph article, e.g. Govt spending deflator, household spending deflator, retail sales deflator

. . . . .the thot plickens :blink:

Do hope someone knowledgeable can post something intelligent and readable on the subject, but if Merv can't get to the bottom of it, then the answer must lie in some murky depths

:huh:

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I watched Mervin K on TV yesterday for an hour discussing the inflation report. He dropped something in that was only mentioned for a few moments, but stuck in my mind.

The MPC targets CPI inflation. As far as I understand it, the inflation figure is given to the MPC & market by the ONS (Office of National Statistics), which as far as I can gather (leaving room for error here) is controlled by the ODPM.

The thing that Mervin mentioned & is widely known, is that there is a deflator used in the ONS figures, I guess to 'deflate' certain things in the CPI calculation.

Mervin seemed to be saying that this deflator wasn't clear & that he has tried to get to the bottom of it for some time, but as the deflator changes, it's hard to know what it will be in the future.

So my question which I know you lot will love, is whether there is a deliberate deception going on that allows the govt to control interest rates yet also to seem at arms length from it by simply controlling the CPI figure. When CPI looks high, but you don't want higher rates, use a higher deflator etc.

It seems plausible to me. Why would any govt completely let go of the leash on IR's when it would have such an impact on them at the polls?

Anyone who knows more about this deflator is welcome to wipe the floor with my post as clearly even though I've heard of it before, I haven't given it an enormous amount of thought or research.

Good post TTRTR.

I ask a very simple question. What is the point of having a measure of inflation and targetting it, if it is fundamentally flawed. That will lead to the mother of all boom and busts. Will the great depression of 2010 be blamed on misconceptions in the measuring and interpretation of fundamental economic parameters that allowed inflation to get out of control? Or is it a convenient way for America to get out of its dreadful economic plight.

I have to say that nobody really understands CPI and it's connection to monetary inflation, except that there's a long term correlation. There are papers about this. I think even Bernanke has written a few. It's mainly theoretical stuff and not really been tested in anger in a wide range of economic circumstances. Quite frankly, I'm concerned. Central banks should be looking at CPI and other things around them, such as M4, and equity, Au prices etc.

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Guest Guy_Montag

Where's King of Nowhere when we want him. He seems pretty well informed about these things.

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BTW. Short sterling seems to have resumed its downward trend after a blip yesterday. Somehow I don't think the markets believe what King is saying...... They see IRs going up and a good chance of two before Christmas.

Our 5.5 by mid 2007 looks on course.

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I'm fairly interested now, because so far I've been unable to find any definition of the deflator that makes a lot of sense.

Deflators are many and varied according to Roger Bootle from this Telegraph article, e.g. Govt spending deflator, household spending deflator, retail sales deflator

. . . . .the thot plickens :blink:

Do hope someone knowledgeable can post something intelligent and readable on the subject, but if Merv can't get to the bottom of it, then the answer must lie in some murky depths

:huh:

Yes that rings a few bells....

This also applies to the Government spending deflator, currently running at 2.7 per cent. This attempts to measure the price of the goods and services purchased by the public sector. I say "attempts" because this is merely sophisticated guesswork.

Since there are no prices for the output of the public sector, estimating this index involves taking the increase in government spending and adjusting that for the "real" increase in what public spending buys. And if you think it is easy to measure that then you are a better man than me, Gunga Din.

What is this deflator & what impact does it have on the CPI figure? And why is it's calculation such a mystery?

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Over the last three years my basic living costs have risen by, on average, 13.1% each year. The 'powers that be' can spin and fiddle all they like but it won't change the truth that's written on my bank statements.

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You can hide inflaiton but you cannot hide its effects. I've said it before but a a large proportion of the population of this and other countries is getting rapidly poorer and their living costs are rapidly oustripping their earnings increases.

I do a college course one day a week (gets me out of the house!) and talking to people there it's beginning to sink in that we're getting poorer.

Interesting to see the other consequences of the miracle economy. One single parent who finds that they're better off staying at home than going out to work because of the benefits system. And several others agonising about what they're going to do to try and shield themselves from the consequences of all this; how to secure a stable future and avoid poverty. Younger people and those priced out are clearly worried, and rightly so. It's an IT course and one of the problems of deflation is that fixing PCs is uneconomic, so why train anyone to fix them?

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Graph of CPI weightings 1996-2006.

Interesting to see the squeezing of the neccessities.

The most neccessary commodities - CPI sections 01 to 05 [i'd exclude 02 as a neccessity] (including Food,Clothing & footwear, Housing, water, gas, electricity, other fuels, Furniture, household equipment).

Seems to be that the weightings are increasingly moving away from the most basic neccessities.

That might be why the price of a sandwich (or other foods) can increase markedly without spooking the CPI measure.

cpi.jpg

post-692-1147343927.jpg

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Good post TTRTR.

I ask a very simple question. What is the point of having a measure of inflation and targetting it, if it is fundamentally flawed. That will lead to the mother of all boom and busts. Will the great depression of 2010 be blamed on misconceptions in the measuring and interpretation of fundamental economic parameters that allowed inflation to get out of control? Or is it a convenient way for America to get out of its dreadful economic plight.

I have to say that nobody really understands CPI and it's connection to monetary inflation, except that there's a long term correlation. There are papers about this. I think even Bernanke has written a few. It's mainly theoretical stuff and not really been tested in anger in a wide range of economic circumstances. Quite frankly, I'm concerned. Central banks should be looking at CPI and other things around them, such as M4, and equity, Au prices etc.

Boom and bust isn't a nature flow of the economy, as we are often led to beleive.

Money doesn't dissapear during a depression, its simply pulled back into the banks.

Were heading for a periodic fleecing by the "money lenders".

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Good thread. I find it alarming that most of the interest rate discussions I hear on my rounds are based upon a nonsense indicator(CPI?). It's a credit to most folks on this Forum that they are aware of at least the possibility that this indicator is being manipulated by the moneychangers as they endeavour to fiddle the books. Indeed, if the moneychangers are capable of manipulating such a fundamental indicator into existance, then how easy will it be for them to manipulate a preferred direction for that indicator? Not very.

IMO the figures that we are being fed by the media are just a means to justify decisions that have already been taken at a higher financial level. In this smoke and mirrors world of boom and bust, spot market carry trades etc.., interest rates will rise when the Banking cartels decide they will rise. Meanwhile, if a fundamental leading indicator like M3 threatens to upset the show, then they will simply remove it from the equation.

---

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the other wonder of CPI is the effect of substitution, i.e. if something in the index gets more expensive you use less of it (so its weightings are decreased). If petrol goes up does your place of work move closer too you? No, thought not.

Whether short sighted or through deliberate manipulation CPI vastly under-represents real inflation in the core cost of living (and yes tax is excluded in its calculation, I wonder if there is a substitutional effect for that too...). The reasons are many (for example, selecting goods for the basket just as they move into the mainstream and start to benefit from the deflationary impact of globalisation and economies of scale) but I think BDO Stoy Hayward or E&Y released a report recently that had real inflation somewhere close to 12% - the only treasury comment was "this is not a recognised measure of inflation". The NAO has also issued a stern warning about manipulation of the figures and the chinese wall between the ODPM and the ONS, infact the BoE (just for one more acronym) last year was threatening to produce its own figures due to loss of faith in those produced by the govt (sorry, the totally different ONS).

Obviously if lower interest rates and inflation mean:

* that state pension and welfare payments do not increase very quickly

* the cost of funding govt debt is lower

* justification for public sector pay increases is harder to come by and you get to claim that 2.5% is actually a "good deal" and above inflation.

* sheeples pre-occupation with "monthly payments" rather than lifetime costs can be easily exploited in a low IR environment and means it isn't hard to produce a massive asset price boom on the back of deregulation of lending standards. The majority of the people who vote for you feel richer and keep voting for you..

So, knowing this, why or how the hell would the ODPM fiddle the figures? Especially as Tony has consistently kept that real sharp tool Prescott in charge - he would be onto dodgy manipulation of statistics like a shot..

My real concern is by selectively averaging across fast increasing core costs (driven by rampant energy and commodity costs) and deflating non-essential consumer goods seeing a one off deflationary impact through the effect of globalisation and then margin erosion as retailers dump stocks in the face of a collapse in demand, we could effectively walk into stagflation without realising it. Once the deflationary impacts of globalisation start to bottom out there could well be a sharp bounce, even in CPI or RPI-X, which catches everyone out and leaves a central bank with already low IRs very little room to move.

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What is this deflator & what impact does it have on the CPI figure? And why is it's calculation such a mystery?

( Bump)

. . . . . any useful findings to report from out there ?

This erudite Treasury offering didn't help at all - Gross Domestic Product (GDP) deflators: a user's guide

Still interested in pursuing this one, but it's hard to get a handle on

:rolleyes:

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