Sunday, May 25, 2008

RPI to undercut CPI? – time to switch!

Labour cannot doctor sky-high inflation

With house prices weakening, we are about to enter a rare phase when RPIX falls below CPI. So changing the target index now would be seen by the markets, equally correctly, as a politically inspired ruse. And that would inflict even more damage on the inflation-fighting credibility of our monetary regime.

Posted by pendulum @ 07:52 AM (1277 views)
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12 thoughts on “RPI to undercut CPI? – time to switch!

  • A prudent government pays down debt when times are good, and lets it build a little when times are harsh.

    New Labour, to it’s eternal shame, has ignored prudence and overseen a huge debt accumulation in both public and consumer finances at a time of relative prosperity.

    As a result, the nation has developed an addiction to debt, and drying out is not going to be easy. Trying to soften the blow by stimulating further consumer debt would be both futile and foolish.

    The cold turkey we are now seeing is accompanied by very strong inflationary pressures; pressures that will lead to inflated wage claims. If control is to be maintained over inflation, those claims need to be resisted.

    Much as it is unwise to attempt to cure a drug addict by suddenly removing his fix and not offering any treatment, so it is unwise to invoke too much cold turkey on the UK economy at one time.

    Regrettable though it is, I think the government now needs to borrow more to provide tangible relief against the most visible signs of inflation, and to inject a small amount of ‘feel good’ into the population.

    My preferred measures would be:

    1) Cut fuel duty by 5p/litre

    2) Abolish tax discs for non-commercial vehicles, replacing them with free discs issued by the vehicle’s insurer.

    3) Raise the basic rate threshold for income tax by £1,000, giving every tax payer a tax reduction of £200 p.a.

    I chose these measures because they are easily understood, would be quickly appreciated, and would be easy to implement. It would ease the pressure for inflationary pay hikes.

    The cost would be an increase in national debt of about £10bn p.a. As a means of addressing what is fast becoming an economic emergency, it is probably worth it.

    But will Brown throw his silly rules (that he has so ridiculously manipulated) out of the window…?

    ..time for a new face at the top!

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  • mark wadsworth says:

    Haven’t people on this site been predicting this switch for ages? Mervyn King has been muttering about it for at least a year.

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  • “And that would inflict even more damage on the inflation-fighting credibility of our monetary regime.”

    Oh come on, our “monetary regime” (Central Banks) are the cause of inflation, how can they possibly fight it? It would be like your worst enemy stabbing himself in the heart. How often does that happen?

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  • markj69 str05 says:

    As I have said on a previous post, IMO any quick fixes will be saved for a new leader. Waves are being made around Milliband, however, I don’t think any new face will make much difference. An awful lot of damage has been done over the last five years. Damage that can not be turned around like one of Labours Budgets. Also the UK like other countries still have a bumpy ride ahead.

    Regarding CPI/RPI if the switch happens, I suggest we all put forward a vote of no confidence for the whole gov’t. Not that I see any credible, experienced alternative.

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  • Mytimeisnigh says:

    Interest rates are still historically low. I’m looking forward to seeing the government forced into a corner and having to be the government in power when interest rates are high. It’s all been very well for them to continually congratulate themselves upon being the party that’s delivered ten years growth, low unemployment and low interest rates, bla, bla bla. However, that was during unpresidented benign world economic times, driven by low inflation due to the Chinese effect, cheap oil, etc etc. Additionally, they inhereted a healthy balance from the Conservatives. Despite these huge advantages, they still felt the need to crank up the biggest consumer and national debt of all time, inflating huge housing and welfare bubbles that are just about to go pop. The past ten years hasn’t been about social justice and economic stabilty, it has been about short sighted irresponsibilty, greed and disillusion. And the consequences of the lies are slowly unfolding in front of the general public. The times they are a changing.

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  • Uncle Tom

    I like your measures, simple and would work.

    1/ Probably required as a temporary measure while speculation has pushed up oil prices so high – but as a nation we should be aiming to reduce the amount of fuel we use by a significant and measurable amount over the next 5 years.

    2/ The road tax is a particular bug bear of mine as I’ve recently bought a VW Golf that falls into the top bracket with Range Rovers and Ferraris. (I took a Diesel BMW out for a test drive yesterday – it did 30mpg on test run against 25mpg of my golf) Yet the road tax is 1/3 of the price shortly to become 1/4 of the price. I don’t mind tax but it should be fair. This clearly isn’t. (Before anyone moans at me for not driving a Toyota Prius, I only do about 4000 miles P/A so still produce far less CO2 than the average driver doing 12k p/a in a 45mpg car.)
    The above extra over road tax isn’t being spent on trees and actually encourages me to get a more powerful car so I get better value for money.
    Thank you for letting me have my rant.

    3/ So simple – love it.

    4/ So when do we start preparing for office ?

    @mark69 str05
    How do the general public put forward a vote of no confidence ? See 4/ above !

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  • Uncle Tom

    How do you calculate £10Bn P/A ?

    How long does it take (given average wage rise of 3.5% on average wage of £25k) to recoup the £1k threshold rise. (Just over a year by my calculations) 25k x 3.5% = £875. And of course the money comes back quicker from the higher rate tax payers.

    Gordon Brown would be proud of your smoke and mirrors campaign – furious he didn’t think of something so simple himself. Given they seem to read here – how long before this is put into action.

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  • markj69 str05 says:

    @str – I wish I knew. I guess for a starter the masses will need to keep lobbying their local MP’s, with absolutely no let-off. Failing that ‘Coup d’etat’?

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  • it_is_going_with_a_bang says:

    Switching from CPI would be political suicide and Gordon Brown knows that very very well.

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  • scandinavian pessimist says:

    Eh?! I thought RPIX excludes mortgage costs!!! Is it a typo or have I missed something?

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  • RPIX includes HPI but not mortgage interest inflation… I think.

    Check this from 2003 – BBC

    I like the para’s: Because HICP is lower than RPIX, switching the measure means adopting a lower target for inflation…. Economists think this could help to prolong the boom in house prices a little bit longer……People receiving pensions and benefits will not have to worry though – Their payments will be uprated in line with RPI inflation.

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  • “Labour cannot doctor sky-high inflation”

    Oh, yes it can!

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