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Inflation- The Real Rate

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Guest mattsta1964

Ok peeps

Inflation is supposedly 3%

Money supply growing at 13-14 per annum

What is the real rate of inflation?

Is it fair to say, the real underlying rate of inflation is circa 10%?

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No.

Inflation = Money Supply - Nominal GDP.

Nominal GDP includes the GDP deflator, i.e. GDP is about 5% ish.

So, inflation is around 8%.

However, you can debate the velocity of money, and the inpact on inflation. Although, 8% is a figure I find in the real world.

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No.

Inflation = Money Supply - Nominal GDP.

Nominal GDP includes the GDP deflator, i.e. GDP is about 5% ish.

So, inflation is around 8%.

However, you can debate the velocity of money, and the inpact on inflation. Although, 8% is a figure I find in the real world.

Also, are we talking about asset price inflation or consumer price inflation?

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Guest mattsta1964
No.

Inflation = Money Supply - Nominal GDP.

Nominal GDP includes the GDP deflator, i.e. GDP is about 5% ish.

So, inflation is around 8%.

However, you can debate the velocity of money, and the inpact on inflation. Although, 8% is a figure I find in the real world.

I thought GDP is the same as economic growth which I believe to be 2.6% in 2006

Please explain to ignorant me! :blink:

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Also, are we talking about asset price inflation or consumer price inflation?

Does it matter? Inflation is inflation is inflation.

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I thought GDP is the same as economic growth which I believe to be 2.6% in 2006

Please explain to ignorant me! :blink:

GDP that is quoted by the ONS (and media) is adjusted for the GDP deflator, the GDP deflator is roughly the same as RPIx IIRC, hence real GDP.

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Guest mattsta1964
GDP that is quoted by the ONS (and media) is adjusted for the GDP deflator, the GDP deflator is roughly the same as RPIx IIRC, hence real GDP.

What's IIRC?

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No.

Inflation = Money Supply - Nominal GDP.

Nominal GDP includes the GDP deflator, i.e. GDP is about 5% ish.

So, inflation is around 8%.

However, you can debate the velocity of money, and the inpact on inflation. Although, 8% is a figure I find in the real world.

Indeed the velocity of money would appear to explain the speed at which this new money makes itself felt in the system properly and is recongnised by the markets as having added to the total money supply. I appreciate that this is not the "definition of velocity" but money that sits in assets or in foreign reserves has low velocity and also does not add to immediate inflationary pressure. Thus the two appear to have some correlation.

I expect that this is why inflation at 14% M4 is sporadic or somewhat 'hidden', having not impacted all aspects of aggregate demand. It'll get there though!

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Yes. In fact it is at the crux of this whole issue.

Well, inflation should include everything, I.e. house prices IMHO.

However, my inflation rate is different to yours as I wouldn't buy a certain product that you would. The only thing I would adjust for, is things getting better in quality (i.e. better TV for the same money), but this is measured as a productivity increase, and therefore included in the GDP measure.

The things that I disagree with is how the government's inflation measure (CPI, or RPI) is chopped and changed to avoid big increases. This is more than the weightings, and how they are changed to suit (e.g. increase the weighting of falling energy costs), but actual substitutions.

E.g. Orange Juice out, Champagne in. TV <tax> out. Small bread loaf out. Child car seats out.

All the big increase are out...

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It depends, if all that extra money is simply parked in bonds, equities or a savings account it will not really add to demand, the velocity of money or consumer price inflation. However, a lot of the inflation we see is cost-push due to energy prices, but this is thanks to the second effect of printing too much dosh.

Edited by BuyingBear

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Hi all,

Does anyone have any info about just how much living expenses (especially food/grocery bills) have shot up lately?

I find that my grocery bill has shot up particularly so in the last six months, EVERYTHING is so expensive these days, not just in traditionally expensive food places (these are not just regular profits, these are M&S profits) but everywhere.

Someone i know visited Milan recently and she reckoned the regular costs (eating out etc) were what seemed like HALF of what they are here (York), and she was expecting 'London prices' when she set off!!

Anyway, that's my rant... basically, i've never felt so ripped off :(

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Yes. In fact it is at the crux of this whole issue.

Exactly

so it depends on what you spend your money on. The best I can come up with for price increases API (ACTUAL PRICE INFLATION)

Absolutely everything (not leaving out anything at all not even the basket you put everything in)

each item x by amount it has increased x by amount spent on that item over period

Any item left out would distort the figure

Examples

something like matches would probably only distort the figure by a very small amount because they are relatively inexpensive and there are not that many sold.

Something like houses would be extremely important and even a small mistake could distort the true picture because they are very very very expensive and there are lots sold.

It is interesting to note what is in Mervyn Kings shopping basket he seems to buy a lot of cheap electronic tat doesnt he?

I also feel inflation is around the same sort of figure as previous posters say 9%?

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Well, inflation should include everything, I.e. house prices IMHO.

They will probably add them if House prices start to drop.

All the calculations aside, I agree with Jason that real inflation seems to be nearer 8%.

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Hi all,

Does anyone have any info about just how much living expenses (especially food/grocery bills) have shot up lately?

I find that my grocery bill has shot up particularly so in the last six months, EVERYTHING is so expensive these days, not just in traditionally expensive food places (these are not just regular profits, these are M&S profits) but everywhere.

Someone i know visited Milan recently and she reckoned the regular costs (eating out etc) were what seemed like HALF of what they are here (York), and she was expecting 'London prices' when she set off!!

Anyway, that's my rant... basically, i've never felt so ripped off :(

Write to your MP. I did just that and got the kind of reply expected. However, if enough people write, who knows?

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Guest mattsta1964
No.

Inflation = Money Supply - Nominal GDP.

Nominal GDP includes the GDP deflator, i.e. GDP is about 5% ish.

So, inflation is around 8%.

However, you can debate the velocity of money, and the inpact on inflation. Although, 8% is a figure I find in the real world.

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What will my MP do though? if anything?

I've so little faith in politicians i don't even know, and much less care, who my local mp is :(

Labour/Tory/Lib Dem etc, along the lines of McDonalds/Burger King/KFC.. basically it's like comparing Cat Sh!t/Dog Sh!t/Pig sh!t etc etc

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Guest mattsta1964

Thanks for such a concise explanation

My next question is, is the bank base rate based on an inflation figure and if so, which one

If inflation is running at 8-10% and you're lucky to get 5.5-6% on savings AND you pay tax on savings not in an ISA, then I would say that the system is downright fraudulent. It's pretty incredible really that so many people don't even question it. Saving money has become a complete waste of time

I actually overpay my mortgage rather than save. They don't tax you on paying off debt....yet!

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Thanks for such a concise explanation

My next question is, is the bank base rate based on an inflation figure and if so, which one

If inflation is running at 8-10% and you're lucky to get 5.5-6% on savings AND you pay tax on savings not in an ISA, then I would say that the system is downright fraudulent. It's pretty incredible really that so many people don't even question it. Saving money has become a complete waste of time

I actually overpay my mortgage rather than save. They don't tax you on paying off debt....yet!

Its even more incredible that so many people have voted nulabour in again and so many people think immigration is good for them or that having a totally incompetant government with an incompetant civil service is somehow acceptable. Are we all asleep?

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Inflation is the rise in goods and services including council tax and including the cost of a home of course!

Between 1997 and 2007 house price are up over 300%, council taxes are up over 200%. Each is a major part of peoples spending.

However, as debt costs fell, the affordability of homes increased, and prices rose. Affordability has been falling recently, and looks set to get worse.

There is an arguement that because housing maybe an asset, depending on use, it should not be in the inflation measure. This is pure nonsense.

Anything capital item that may be rented can be considered an asset, for instance a van, but the price of any such item/asset is dependant upon supply and demand just like anything else which is consumed and produced. Vans can be rented for £30 per day - £9-10k pa but strangely do not cost £150k each, because there is a endless supply of them.

The fundemental problem is that the inflation measure doesn't capture real world inflation. For instance, its recognised by the BOE that food inflation is at least 8%, one way of beating this level of price rises is to BORROW or SPEND SAVINGS at 6% and buy as much storable food as possible. That way you benefit from the 8% rise.

"According to the Office for National Statistics, seasonal food prices have risen by 10pc in the past year. Meanwhile, overall food and drink costs are up by 6pc - the highest rate in the Western world" "Economists believe it is another example of where businesses are pushing through big price increases"

http://www.telegraph.co.uk/money/main.jhtm...2/ccprof102.xml

The way to look at it is if the weighing of items in the inflation measure, with dvds and digital cameras, hedonic adjustments, sustitution matching etc, do not in any manner match your own real world pattern of spending, your own inflation rate, which is running at say, 13%, its best to borrow at 6%odd now, and simply wait for the prices of food etc.. to rise and evaporate the real value of the loan.

To do this your have to forecast your likely spending ahead for the year, or years. This is going on at companies. They will borrow to offset rising projected prices. This in turn creates more money printed and more money in circulation, which means more inflation.

Edited by brainclamp

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Thanks for such a concise explanation

My next question is, is the bank base rate based on an inflation figure and if so, which one

The Bank of England should hit CPI (Consumer Price Index) at 2% at a two year horizon, with it not exceeding 1% either side of 2% (1% - 3%) at any time.

Of course, they have failed at this anyway.

If inflation is running at 8-10% and you're lucky to get 5.5-6% on savings AND you pay tax on savings not in an ISA, then I would say that the system is downright fraudulent. It's pretty incredible really that so many people don't even question it. Saving money has become a complete waste of time

I actually overpay my mortgage rather than save. They don't tax you on paying off debt....yet!

Yup.

The positive point of all this is (if there is one), we're all becoming worse off together, so it's not like your on your own.

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• Provisional Q4 2006 data shows

that the prices paid for all fuel

and light has risen by 26.4 per

cent in real terms between Q4

2005 and Q4 2006.

• Domestic electricity prices,

including VAT, rose by 24.3 per

cent in real terms in the year to

Q4 2006.

• Domestic gas prices, including

VAT, rose by 37.6 per cent in

real terms in the year to Q4

2006.

• The annual rates of price growth

for both electricity and gas are at

record levels.

From the ONS. Inflation 3% ? - they are having a laugh...

F

Fuel_Prices.doc

Fuel_Prices.doc

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