Wednesday, Nov 01, 2006

Inflation figures are meaningless

The Daily Telegraph: King attacks inflation index for excluding housing boom

Inflation exists when prices, on average, are rising. Of course you have to decide first what items you include in that average. If the Bank of England Governor is complaining about the compilation of CPI then surely the City will start to suspect that government bonds at 4.75% are not adequately compensating them above real inflation.

Posted by ontheotherhand @ 09:10 AM (398 views)
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11 Comments

1. the bald man said...

One of my major concerns is that inflation is being hidden and when the potential future economic problems this is creating.

Wednesday, November 1, 2006 09:44AM Report Comment
 

2. kpjcomp said...

Interesting!!!! yesterday King was quoted saying that 0.25% rate hike was not in the bag.
Could this mean a 0.5% increase is??...

Wednesday, November 1, 2006 10:27AM Report Comment
 

3. sirgoogle said...

Mr King said: "It isn't easy for us to understand why house prices relative to conventional earnings are as high as they are."

and... "Appearing before a House of Lords committee, Mr King lambasted the Brussels-based experts who help design the Consumer Price Index, saying plans to include house prices had been delayed so often he did not expect to see them bear fruit in his lifetime."

So we are in very good company when we critisise the CPI for not including House prices and that consequently real inflation is much much higher for the man-on-the-street than the Govt admits.

Wednesday, November 1, 2006 10:29AM Report Comment
 

4. sirgoogle said...

kpjcomp ...

My take on this is that the MPC has to use the CPI for "inflation" and ignore all other indicators - therefore we should expect that there may well be NO IR rise in Nov. Mr King is simply preparing the ground for this news - and casting blame on the index and Govt for restraining him.

Wednesday, November 1, 2006 10:32AM Report Comment
 

5. ontheotherhand said...

sirgoogle - You make an interesting point and I tend to agree. On the other hand, with his mandate allowing him to go down to 1.1% CPI from the present 2.5% I don't think he can really blame the index and the Govt. restraining him. I think it would take quite a lot of rate hikes from him to get close to 1.1%

Wednesday, November 1, 2006 10:44AM Report Comment
 

6. sold 2 rent 1 said...

sirgoogle,

Good point. But let us not forget that it is future expectations of inflation that the MPC are trying to predict
There are a lot of factors at work; retail sales, wages, HPI, oil, US recession, and many more.

He is just trying to keep his options open as new information is coming in all the time.

As the economy approaches the end of its expansion the decision becomes harder and harder

No IR rise will send a clear message to the public - keep buying

ontheotherhand,
The CPI and RPI are not conflicting indicators yet (as they are both over target). Maybe Merv suspects that CPI will come back to under 2% but RPI will take off to over 4% over the coming months. Then this will be a big headache

Wednesday, November 1, 2006 11:45AM Report Comment
 

7. kpjcomp said...

ontheotherhand,..

Very good point, the goverment would just turn round and say, our target was 2%, it was your decision keep it above not ours.
I beleive King thinks inflation is really much higher, now if that's the case he'll be thinking, hang on a tick our profits are really getting eroded by this stupid CPI.

Wednesday, November 1, 2006 11:57AM Report Comment
 

8. tyrellcorporation said...

I find it so bizarre that with so much at stake the conversation is not really about the elephant in the room but more about why the elephant isn't wearing Reebok trainers!

Expectation of rampant inflation being hidden - it's all I hear about from friends and colleagues and is definately now feeeding into wage demands. I can't believe that King is having a 'wobble' about IRs... he cites 'the possibility of a slowdown in consumer spending' or 'the possibility of a slowdown in the States' or 'a possibility for medium term falls in oil prices'...He ought to concentrate more on the here-and-now in my opinion.

Wednesday, November 1, 2006 12:11PM Report Comment
 

9. Dogbaron said...

They'll include house prices in any prefered inflation measure when they're going down. That's for sure.

Wednesday, November 1, 2006 05:57PM Report Comment
 

10. geed said...

Sweet Jesus! At last someone with authoritative economic clout publicly stating the blatantly obvious. This is clear sign that Merv understand that he is not really keeping real inflation in check and therefore not really being given the tools to do his job properly.

As an Engineer (of which I am one), I do not make decisions on gut feelings. I make analytical decisions based on the data I am presented with, however, my experience is drawn upon on a regular basis to help plan and conduct test work which will present me with more relevant data should I not already have it at hand. I do not have my hands tied I the way the BoE does.

According to their metrics inflation is only 0.4 of a percentage point above target, irrespective of what they really know they must make decisions based on this data. 0.25% rise here we come.

Thursday, November 2, 2006 02:05AM Report Comment
 

11. paul said...

I think the timing of this announcement is interesting.

When houseprice inflation was rising sharply Mervyn didn't call for it to be included in the CPI (which would have prompted rate rises).

Now when the housing market is on shaky ground, he suddenly feels an urgency to include HPI in the CPI?

Very suspicious.

Thursday, November 2, 2006 10:57AM Report Comment
 

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