Sunday, April 16, 2006
Haircuts aren't a snip - even with low inflation
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

I am getting worried about visiting my hairdresser. No, it’s not because I fear being told to abandon that ridiculous combover, or that my perm is out of fashion, or even that it is time to invest in some highlights.

What I’m worried about is the price. Every time I go and get my hair attended to, the cost goes up. Not by much, usually 50p or £1, but enough to notice, and enough to make me wonder whether we are really living in an era of ultra-low inflation.

The same thing happens, on an even more dramatic scale, when people get their gas, electricity and water bills. Or fill up with petrol. Oil prices refuse to lie down, hitting new records on Friday. The days when you could get a full tank for £30 are becoming a distant memory.

Nor, if you are tempted to take the train, is it possible to escape these rising prices. A rush-hour day return from London to Birmingham, second-class, costs the princely sum of £108.

The common theme is that prices appear to be rising sharply in all these areas. Nor is this just a figment of our imagination.

Hairdressing prices, according to official figures, have gone up by 3.8% over the past year and by an impressive 57% since the start of 1997. That compares with a rise of 2% in the consumer prices index (CPI) in the past 12 months, and a surprisingly small increase of just 13.9% since 1997. Haircuts, in other words, have risen at more than four times the rate of prices in general.

Gas prices, which are worrying the Bank of England’s monetary policy committee, have gone up by more for domestic users in the past 12 months — 14.5% — than the consumer prices index has in nine years.

Other spectacular increases include liquid fuels (heating oil), up 42.1%, water bills 13.6%, and electricity 10.7%.

Not so dramatic but still increasing much more rapidly than inflation are household repair bills, up 5.2%, bus fares 6.4%, and train fares 4.3%.

We shall know this week what happened to inflation in March. The Bank has warned that higher gas prices will push it above the 2% target. It is a fair bet, however, that it will remain within striking distance of the target, both now and in the coming months.

But how, people ask, can you have inflation of 2%, and an index that has risen by less than 14% in nine years, when so many things are going up much faster?

My response is to refer them to the National Statistics website, and the official breakdown of the CPI. It shows that while many things are indeed going up, many others are falling. Cameras are down 24% in a year, clothing 4.5%, shoes 5.7%, sports equipment 4.1%, computers 14.2%, and so on.

In general, goods prices are stable or falling — “things” costs no more now on average than in 1997 — while anything involving people and services is rising fast. Hence my worries about haircuts. It all adds up to low inflation, even though there is huge volatility within an index that is stable overall.

Yes, say critics, but you can choose whether to buy a new shirt or camera. You can choose, for that matter, whether to visit the hairdresser. But you cannot choose whether to pay the gas or water bill or fill the car with petrol. And it is the rising price of these necessities (though not food, up less than 1%) that is putting the squeeze on.

There is something in this. Many retailers are reporting the effect of higher energy bills on their customers’ willingness, or ability, to spend. When fuel bills are rising, many households have to cut back on life’s little luxuries. Some pensioners have to cut back on a lot more than that.

So there is a degree of scepticism out there about whether the official inflation numbers are telling the true story, and my sense is that such scepticism has been increasing.

This links in, in turn, to a second, and very important, phenomenon. I’m referring to inflation expectations. These — which measure what individuals, businesses, unions and the financial markets expect to happen to prices — have been very well-behaved in recent years.

The big achievement of Bank independence, indeed, has been to reduce inflation expectations. Britain has had low inflation since late 1992. But it is only since May 1997, when Gordon Brown handed over decisions about interest rates to the Bank, that people have come to believe low inflation is here to stay. Expectations have “locked on” to the official 2% inflation target.

This has survived a recent peak in retail-prices inflation of 3.5% in December 2004, which might in the past have been a trigger for higher wage claims. It also survived last year’s sharp rise in petrol prices.

Just recently, however, inflation expectations have moved higher. The Bank has for the past few years commissioned NOP, the pollster, to conduct a survey on inflation attitudes each quarter.

The latest, published last month, was carried out in February among nearly 2,000 people. It showed a median view that prices over the past 12 months had risen by 2.7%, up from 2.3% in November and the highest in the survey’s five-and- a-half years. As for what people expect to happen over the next 12 months, the median figure was 2.6%. equalling the series high achieved in November 2003.

This is not, yet, a signal that the Bank has lost its grip on expectations. Wage settlements remain subdued, businesses see pricing power returning only patchily and the financial markets still believe the low-inflation era will persist.

But the rise in expectations shows the impact of a few big price rises, such as those for utility bills. The Bank will be keen to see that this turns out to be a blip, not a sustained increase in people’s price expectations.

One problem for the Bank is that it is not clear what its policy response should be in these circumstances. Cutting interest rates would not be sensible, but neither would raising them, given that expectations have risen because of events outside the Bank’s control, notably higher energy prices. There are circumstances, indeed, when higher interest rates, which themselves add to household bills, could further destabilise inflation expectations.

So the Bank will be watching this one very closely. And I shall be watching to see whether those haircuts keep rising in price every time I need a trim.

PS: A new book on Adam Smith, by the novelist and historian James Buchan (Adam Smith and the Pursuit of Perfect Liberty, Profile Books, £14.99), argues we have got it wrong about the great man. Buchan lays into Alan Greenspan for praising Smith’s “invisible hand” as the driving force behind free-market capitalism, and has a go at Gordon Brown for latching on to the man we have come to think of as the father of economics.

It’s all a bit daft. While Buchan is right to try to correct the fact that people have ignored Smith’s philosophical contribution, he is wrong to downplay the economics. Writing at the dawn of the industrial revolution. Smith provided its template, and his writings remain relevant.

But what jumped out at me was this, when the author is bemoaning his hero’s fate. He writes: “The vulgar answer is that Adam Smith fell among economists and politicians who constitute, more even than professional footballers, always the least-literate sections of English-speaking society.”

That’s unfair, even on footballers. We’ve had footballer poets, novelists, and economists. Mervyn King, a football fan, receives detailed comments on the Bank’s inflation report from one professional footballer. Mind you, the player in question is German.

From The Sunday Times, April 16 2006

Comments

Hurrah! I thought I was the only one to notice this.

Posted by: Richard G Brown at April 16, 2006 11:26 AM

Hi

First, I don't use a hairdresser (I have clippers), and second my wife who does use a hairdresser normally spends about £100 a time. So 50p increase every three months is £2 a year giving a inflation rate of 2%. See the CPI is exactly measuring inflation.

Anyway which type men use hairdressers, I was always told men go to Barbers, and women to hairdressers?

Posted by: kingofnowhere at April 18, 2006 09:43 AM

That's a sensible economic decision - clippers have come down in price as haircuts have gone up. But if your wife is only paying 50p extra each time she's either doing well or not telling. 50p or a pound on £20 (yes £20 - I could buy a set of clippers for that) is quite a high rate of inflation. As for barbers, I think you're talking about the pre-unisex era there - Brylcreem and short back and sides.

Posted by: David Smith at April 18, 2006 09:55 AM

You just don't understand gentlemen, there's nothing hair-raising about official inflation figures at all. Just this week Margaret Hodge told us that the economy is in great shape with very low unemployment and low inflation!

And inflation is very low - we know this because our honest and prudent leaders tell us so. These low official figures have the added benefit that the MPC don't feel pressured to raise interest rates, which could likely send the housing market into freefall, and propel thousands more good people into insolvency.

Now just ignore those jibes about the housing market tail wagging the MPC dog here for a moment - don't be so unpatriotic! They're looking after us, and low inflation figures are Good News For Everyone.

High inflation means higher interest rates and that lowers our esteemed leaders' re-election chances.

And we can't have that now, can we?

Posted by: Paul Owen at April 19, 2006 12:46 PM

David

A few observations:

I get a hair cut and pay my utility and energy bills at least every month. I buy a digital camera once every 5 years (I dont actually own one). Does the CPI basket take account of this? Additionally, the goods on which we have deflation appear to be luxuries, while inflation appears to be 10%+ on essentials.

Posted by: Ash at April 19, 2006 08:23 PM

To be fair to the official statisticians, the inflation baskets are based on average spending patterns from detailed surveys of households - e.g. the Expenditure and Food Survey - so they don't assume people buy a digital camera every month.

Posted by: David Smith at April 19, 2006 08:37 PM

The additional weakness of published inflation figures (and the level of pension increases) is that they inevitably conflate the expenditure of all memebers of society. As a retired economist I ama ware that I spend relatively little of my income on the goods which are falling in price and an increasing proportion on goods which are pretty effectively fixed costs - even using price comparison sites etc, there is a rapid end to the point at which eg energy can be bought more cheaply from one supplier than another. Thus it would be helpful o have a pensioners price index except that with growing numbers of pensioners the range of income and expenditure must be growing.

Posted by: John Rees at April 22, 2006 05:42 AM
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