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Merv To Add Hpi To The Inflation Basket

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Yet another measure to fiddle Inflation Reports from the Bank of England

Merv is at it again. Sometimes I wonder who really cares about the CPI or the RPI. Gordon Brown must feel really smug in his big leather chair at no.10 as he reads the news. This could as well be another classic piece of political spin: now that HPI (house price inflation) is slowing down, and if you haven’t been living under a rock or in a cave, you might have realised that it could turn negative soon, the BOE wants to add it to the official inflation figures. Of course, that would mean lower overall inflation, everybody is happy, interest rates can be reduced again and the madness can go on. That’s the debt madness I’m talking about.

The intolerable thing about this Inflation hypocrisy lies in the very structure of the BOE. Their job is to keep inflation between certain percentages. The only measure they have to do so is by controlling the Base Rate. Theoretically, if inflation is high, you raise the Base Rate, and people stop borrowing for unnecessary items, thus reducing price inflation. However there is another, more subtle measure the BOE can implement: fiddling the inflation figures. How do they do that? Let me explain:

These are the items included in the inflation basket and their percentage weight:

1 Food & non-alcoholic beverages 10.3%

2 Alcohol & tobacco 4.3%

3 Clothing & footwear 6.2%

4 Housing & household services 11.5%

5 Furniture & household goods 6.8%

6 Health 2.4%

7 Transport 15.2%

8 Communication 2.4%

9 Recreation & culture 15.3%

10 Education3 1.8%

11 Restaurants & hotels 13.8%

12 Miscellaneous goods & services 10.0%

By looking at them, you’d be surprised to know that Restaurants and Hotels are more relevant than Housing, or that Recreation and Culture is way more important than Food. It’s evident how these figures are weighed against their intrinsic inflation. The less inflation is expected, the more they are considered.

As the housing market is about to suffer a major downturn, the BOE has an easy decision to make on this one.

Personally, I decided that I want to live in an igloo made with I-pod bricks and eat DVD players, as they come so cheap and they are the pillars of my subsistence.

Cheers

Here’s the article from Thisismoney.

Thisismoney

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Yet another measure to fiddle Inflation Reports from the Bank of England

Merv is at it again. Sometimes I wonder who really cares about the CPI or the RPI. Gordon Brown must feel really smug in his big leather chair at no.10 as he reads the news. This could as well be another classic piece of political spin: now that HPI (house price inflation) is slowing down, and if you haven’t been living under a rock or in a cave, you might have realised that it could turn negative soon, the BOE wants to add it to the official inflation figures. Of course, that would mean lower overall inflation, everybody is happy, interest rates can be reduced again and the madness can go on. That’s the debt madness I’m talking about.

The intolerable thing about this Inflation hypocrisy lies in the very structure of the BOE. Their job is to keep inflation between certain percentages. The only measure they have to do so is by controlling the Base Rate. Theoretically, if inflation is high, you raise the Base Rate, and people stop borrowing for unnecessary items, thus reducing price inflation. However there is another, more subtle measure the BOE can implement: fiddling the inflation figures. How do they do that? Let me explain:

These are the items included in the inflation basket and their percentage weight:

1 Food & non-alcoholic beverages 10.3%

2 Alcohol & tobacco 4.3%

3 Clothing & footwear 6.2%

4 Housing & household services 11.5%

5 Furniture & household goods 6.8%

6 Health 2.4%

7 Transport 15.2%

8 Communication 2.4%

9 Recreation & culture 15.3%

10 Education3 1.8%

11 Restaurants & hotels 13.8%

12 Miscellaneous goods & services 10.0%

By looking at them, you’d be surprised to know that Restaurants and Hotels are more relevant than Housing, or that Recreation and Culture is way more important than Food. It’s evident how these figures are weighed against their intrinsic inflation. The less inflation is expected, the more they are considered.

As the housing market is about to suffer a major downturn, the BOE has an easy decision to make on this one.

Personally, I decided that I want to live in an igloo made with I-pod bricks and eat DVD players, as they come so cheap and they are the pillars of my subsistence.

Cheers

Here’s the article from Thisismoney.

Thisismoney

I hate to do this to you, but just in case anyone else has made the same mistake...

Mervyn King is not advocating the BoE target HPI.

He wants to target mortgage costs.

These are two very different things.

See here

http://www.housepricecrash.co.uk/forum/ind...=51712&st=0

Edited by ?...!

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I hate to do this to you, but just in case anyone else has made the same mistake...

Mervyn King is not advocating the BoE target HPI.

He wants to target mortgage costs.

These are two very different things.

So if he raises rates, mortgage costs go up, allowing him to reduce rates, which drives mortgage costs down. :lol:

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I don't see how this is workable. Mortgage costs are entirely a function of interest rates so it seems a bit like a snake swallowig its own tail. Perhaps he means to target loan arrangement fees?

Of course if included then inflation would look worse every time he raised rates until the mortgage component wasnt such a large percentage of a persons expenditure. i.e To break this would require a sizeable crash in capital values.

The concept that the BOE could try and cut cpi by cutting IR's because of mortgage payments would quickly lead to people realising that they are targetting a stat rather than the reality, and the whole thing would quickly fold...I'd hope!

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So if he raises rates, mortgage costs go up, allowing him to reduce rates, which drives mortgage costs down. :lol:

Errr NO.

If he raises rates, mortgage costs go up, pushing inflation up, requiring higher rates.

It's an engineered deflating of the bubble.

If this happens house prices will become inversely linked to the price of oil. I'm sure you can work out the rest.

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So if he raises rates, mortgage costs go up, allowing him to reduce rates, which drives mortgage costs down. :lol:

Homer Simpson: Okay, boy. This is where all the hard work, sacrifice, and painful scaldings pay off.

Employee: Four pounds of grease... that comes to... sixty-three cents.

Homer Simpson: Woo-hoo!

Bart Simpson: Dad, all that bacon cost twenty-seven dollars.

Homer Simpson: Yeah, but your mom paid for that!

Bart Simpson: But doesn't she get her money from you?

Homer Simpson: And I get my money from grease! What's the problem?

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Errr NO.

If he raises rates, mortgage costs go up, pushing inflation up, requiring higher rates.

It's an engineered deflating of the bubble.

If this happens house prices will become inversely linked to the price of oil. I'm sure you can work out the rest.

Could it really be this simple?

If this happens then I'll end up being one of the luckiest people in the country.

That is, if I'm still here; but equally, if sterling is seen to be tied to HPI, then best

to look for alt currencies, or even gold to make sure you keep some value in what you've got.

It kiboshes my deflation argument mind you - stagflation it is then folks....

GT.

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Well, the first thing I'd like to see as soon as the BOE works out exactly what they mean is a retrospective look at our inflation rates over the last ten years.

Of course, this is not really possible as we get a kind of macro quantum effect when the act of including mortgage costs changes the numbers we think we're assuming (that is to say, we can no longer 'observe' things happening as if they were separate, for the very act of observation causes real change — which is really the position we should take in finance but do not). I think this explains why the market is always so far behind when the really big events, such as the upcoming crash, unfold. They're simply incapable of doing a calculation that includes thousands (or millions) of 'live' (or 'originary' in von Mises shpeel) strands that represent the real economy; or I should say real life, for imagining that economics is separate and can be thus analysed is a delusion.

Finally, economics enters Schrodinger's world.

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Errr NO.

If he raises rates, mortgage costs go up, pushing inflation up, requiring higher rates.

It's an engineered deflating of the bubble.

If this happens house prices will become inversely linked to the price of oil. I'm sure you can work out the rest.

Please excuse me if I am stating the bleedin obvious, but, does this mean that we could be in an August 2005 situation AGAIN if Merv does this (IR cut re-ignites HPI). Just as everything is falling nicely into place, the too long awaited crash is mothballed once more??!!

Edited by Queen of Spades

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But if mortgage costs go up then their contribution to the CPI will also increase, meaning CPI will rise, so further interest rate increases will be needed to counter the inflation. And so on. If implimented soon then all these fixed rates coming off the boil soon would cause CPI to skyrocket.

And of course, the opposite is true, mortgage costs going down would allow decreases in interest rates. And vice versa. But I don't think the markets (bonds) would let this happen anytime soon.

Targetting mortgage payments strikes me a being an odd way of dealing with things though. Why not just track average house price increases? Not everyone has a (huge) mortgage on their house. But maybe their reasoning is that HPI doesn't have much higher to go and wouldn't be a useful indicator. But it sounds like the banks are trying to obfuscate things, as usual.

I've certainly confused myself trying to follow this logic through.

Edit: this was in response to OzzMosis' post, yeah it took me a long time to write up.

Edited by christh

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Yet another measure to fiddle Inflation Reports from the Bank of England

Merv is at it again. Sometimes I wonder who really cares about the CPI or the RPI. Gordon Brown must feel really smug in his big leather chair at no.10 as he reads the news. This could as well be another classic piece of political spin: now that HPI (house price inflation) is slowing down, and if you haven’t been living under a rock or in a cave, you might have realised that it could turn negative soon, the BOE wants to add it to the official inflation figures. Of course, that would mean lower overall inflation, everybody is happy, interest rates can be reduced again and the madness can go on. That’s the debt madness I’m talking about.

The intolerable thing about this Inflation hypocrisy lies in the very structure of the BOE. Their job is to keep inflation between certain percentages. The only measure they have to do so is by controlling the Base Rate. Theoretically, if inflation is high, you raise the Base Rate, and people stop borrowing for unnecessary items, thus reducing price inflation. However there is another, more subtle measure the BOE can implement: fiddling the inflation figures. How do they do that? Let me explain:

These are the items included in the inflation basket and their percentage weight:

1 Food & non-alcoholic beverages 10.3%

2 Alcohol & tobacco 4.3%

3 Clothing & footwear 6.2%

4 Housing & household services 11.5%

5 Furniture & household goods 6.8%

6 Health 2.4%

7 Transport 15.2%

8 Communication 2.4%

9 Recreation & culture 15.3%

10 Education3 1.8%

11 Restaurants & hotels 13.8%

12 Miscellaneous goods & services 10.0%

By looking at them, you’d be surprised to know that Restaurants and Hotels are more relevant than Housing, or that Recreation and Culture is way more important than Food. It’s evident how these figures are weighed against their intrinsic inflation. The less inflation is expected, the more they are considered.

As the housing market is about to suffer a major downturn, the BOE has an easy decision to make on this one.

Personally, I decided that I want to live in an igloo made with I-pod bricks and eat DVD players, as they come so cheap and they are the pillars of my subsistence.

Cheers

Here’s the article from Thisismoney.

Thisismoney

Listen to Inside Money on Radio 4 where a chap from Stockton called Adam received an audience with Merv. The programme was very interesting, thanks Adam if you are reading, and even included the issue of the money supply which is currently at 13% so even though other factors are lower could cause higher than expected inflation. I know this argument has been made time and again on here but it is the first time I have heard it outside this forum.

Merv said he wished mortgage costs were included in the CPI. The CPI is meant to be a harmonised EU measure and the items which are included within the CPI are outside his control.

There was a very interesting caveat. If rates rose to 8% which could be possible given the rising money supply due to demand for borrowing then mortage rates would be 9.5%.

Is this a horror story or is this the future? Who knows?

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Listen to Inside Money on Radio 4 where a chap from Stockton called Adam received an audience with Merv. The programme was very interesting, thanks Adam if you are reading, and even included the issue of the money supply which is currently at 13% so even though other factors are lower could cause higher than expected inflation. I know this argument has been made time and again on here but it is the first time I have heard it outside this forum.

Merv said he wished mortgage costs were included in the CPI. The CPI is meant to be a harmonised EU measure and the items which are included within the CPI are outside his control.

There was a very interesting caveat. If rates rose to 8% which could be possible given the rising money supply due to demand for borrowing then mortage rates would be 9.5%.

Is this a horror story or is this the future? Who knows?

Horror story? not for everybody

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I don't see how this is workable. Mortgage costs are entirely a function of interest rates so it seems a bit like a snake swallowig its own tail. Perhaps he means to target loan arrangement fees?

Of course if included then inflation would look worse every time he raised rates until the mortgage component wasnt such a large percentage of a persons expenditure. i.e To break this would require a sizeable crash in capital values.

The concept that the BOE could try and cut cpi by cutting IR's because of mortgage payments would quickly lead to people realising that they are targetting a stat rather than the reality, and the whole thing would quickly fold...I'd hope!

Surely Mr King cannot really be saying that he wants mortgage cost in the CPI? If they were in the CPI and they had, say a 35% weighting then the BoE could just move CPI up and down at will by just raising or lowering interest rates. In other words as underlying rates of inflation went up due to sharply rising prices of goods and sevices the BoE could keep a lid on the CPI number by dropping interest rates. Interesting idea - keep inflation down by dropping interest rates!

Actually, come to think of it, if people knew that rising costs of goods and services would be exactly compensated by the BoE by a reduction in their mortgage rate then they woudl be very happy as they would effectively hedged against risjng living costs. That would mean they would not see a fall in their living standards as the price of goods and services went up and they would not therefore need to ask for a pay rise. Errm... is that not precisely what has been happening for the past 5 years and look where it got us - massive asset price inflation.

I really do not think Mr King is really advocating this - I think we have misunderstood what he said.

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The BOE boss are wrong on all countries. Iceland had 14% interest rates last year when their housing market peaked. The reason were that they had the "old style" CPI, that most countries have replaced with the modern easy Al version.

Edited by carseller

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Errr NO.

If he raises rates, mortgage costs go up, pushing inflation up, requiring higher rates.

It's an engineered deflating of the bubble.

If this happens house prices will become inversely linked to the price of oil. I'm sure you can work out the rest.

Sorry yes you're right.

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Could it really be this simple?

If this happens then I'll end up being one of the luckiest people in the country.

That is, if I'm still here; but equally, if sterling is seen to be tied to HPI, then best

to look for alt currencies, or even gold to make sure you keep some value in what you've got.

It kiboshes my deflation argument mind you - stagflation it is then folks....

GT.

No not stagflation.

The theory says...

Property would become a depreciating asset. Prices would diminish indefinately, not to zero, but to a level much lower than today.

Anyone hoping to "buy in slump" and "catch the next boom" will see proprty prices continue to fall year on year in ever diminishing amounts. Until they flatten out at very affordable levels.

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No not stagflation.

The theory says...

Property would become a depreciating asset. Prices would diminish indefinately, not to zero, but to a level much lower than today.

Anyone hoping to "buy in slump" and "catch the next boom" will see proprty prices continue to fall year on year in ever diminishing amounts. Until they flatten out at very affordable levels.

which is all we hope

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No not stagflation.

The theory says...

Property would become a depreciating asset. Prices would diminish indefinately, not to zero, but to a level much lower than today.

Anyone hoping to "buy in slump" and "catch the next boom" will see proprty prices continue to fall year on year in ever diminishing amounts. Until they flatten out at very affordable levels.

Can it be described as slumpflation?

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By looking at them, you’d be surprised to know that Restaurants and Hotels are more relevant than Housing,

Not at all. Restaurants are a perfect indicator of disposable income - probably the first luxury to go out of the window when you're trying to cut back.

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No not stagflation.

The theory says...

Property would become a depreciating asset. Prices would diminish indefinately, not to zero, but to a level much lower than today.

Anyone hoping to "buy in slump" and "catch the next boom" will see proprty prices continue to fall year on year in ever diminishing amounts. Until they flatten out at very affordable levels.

What % probability would you attach to that scenario, strictly in your own opinion?

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Well, the first thing I'd like to see as soon as the BOE works out exactly what they mean is a retrospective look at our inflation rates over the last ten years.

Of course, this is not really possible as we get a kind of macro quantum effect when the act of including mortgage costs changes the numbers we think we're assuming (that is to say, we can no longer 'observe' things happening as if they were separate, for the very act of observation causes real change — which is really the position we should take in finance but do not). I think this explains why the market is always so far behind when the really big events, such as the upcoming crash, unfold. They're simply incapable of doing a calculation that includes thousands (or millions) of 'live' (or 'originary' in von Mises shpeel) strands that represent the real economy; or I should say real life, for imagining that economics is separate and can be thus analysed is a delusion.

Finally, economics enters Schrodinger's world.

That's it. If electrons follow Heisenburg's uncertainty principle (how do we work out exactly where electrons are other than chucking electrons at them, which influences their location?) then systems built on the basis of lots of electrons shifting around are hardly likely to be deterministic.

Step one: Make a model that observes a system

Step two: Use the model into the future to interact with the system in order to realise desired gains.

Step three: Such interaction inevitably changes the nature of the system, thus rendering the model invalid.

Step four: Make a new model.

Economics influences economics influences economics, i guess. Perhaps we do need some probabilistic framework to handle this stuff.

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Can it be described as slumpflation?

No, that's shagflation you're thinking of.

Is Merv supposed to be a mental defective? He 'wishes' he could include something or other in something or other?

Maybe his staff have too many pressing engagements to indulge in a bit of shadow modelling?

Why doesn't he just say that neither he, nor the Bank of England, give a rat's arrse about the rate of inflation. All he cares about is his big fat salary and the big fat associated kudos.

To maintain this salary plus kudos he must simply make sure that one irrelevant number hits another. And he still gets that wildly wrong.

(Yes, I know it's the MPC but if he knew anything about the actual aconomy he might be able to persuade the others (who seem even less capable than him).)

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What % probability would you attach to that scenario, strictly in your own opinion?

Well that depends.

If the current BoE and MPC structure and remit remains exactly the same forever, and I ignore all the external influences of the global economy, and assume there are no rare events to impact on anything, and solely look at the UK as individual case.

Then that is what will happen, because that is what is designed to happen.

It is good for eveyone in the UK except those awaiting capital gains from their property holdings, it will make the UK a more competitive business environment within the global economy, by reducing wage demands.

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Well that depends.

If the current BoE and MPC structure and remit remains exactly the same forever, and I ignore all the external influences of the global economy, and assume there are no rare events to impact on anything, and solely look at the UK as individual case.

Then that is what will happen, because that is what is designed to happen.

It is good for eveyone in the UK except those awaiting capital gains from their property holdings, it will make the UK a more competitive business environment within the global economy, by reducing wage demands.

A better question then might be: what is the probability that mortgage costs will be included in CPI?

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