Comments: Inflation on the horizon? No, it's just a mirage

The RPI is a better measure of inflation for both employers and unions to use than the alternatives - as it includes housing costs. Employers and unions who ignored changes in disposable income of staff/members because of housing cost changes would be in gross dereliction of duty - and would ignore factors causing staff to seek better paid jobs elsewhere. Actually, you probably need separate indices for mortgage-payers and tenants to spot where trouble might arise. The crucial element is the value of the 'pound in your pocket' and CPI does not measure this as long as it excludes housing costs.

Posted by Paul Bivand at October 24, 2005 10:03 AM

RPI probably is a better index for employers and unions to use as a guide for setting pay increases. But the RPI is no use as a target for the MPC, as every time the MPC reduces interest rates the RPI falls the following month. This explains why RPI fell in September, following the August interest rate cut, while RPIX rose.

But suddenly this whole target-setting business has become a burning issue with the choice of Ben Bernanke to replace Alan Greenspan. Ben (if we can call him that so soon) is an advocate of inflation target setting. Assuming Ben tries to introduce the same system for the FOMC as for the MPC (and the ECB) there are big questions about which measure of inflation to use as the target and whether to specify a target range.

Also, there’s been a lot of media comment recently about the Fed being more interested in the CPI-less-food-and-energy (core index) rather than the all-items CPI. It seems better to focus on the all-items index. But a graph of both shows the all-items index just oscillates around the core index over time. The core index gives a smoother picture of what’s happening to inflation.

This also raises the question of why a UK ‘core’ inflation index is never mentioned. And if the US ends up with a different target to the UK, should we change to match the US or stick with the EU approach?

Posted by David Sandiford at October 25, 2005 12:15 PM

"Broad money, M4, has been about the worst predictor of inflation. In the past 10 years broad money has risen by more than 100%, while consumer prices have increased by only 16%. It has had nothing of value to say about inflationary pressures in the economy"

I'm no economist but I am a monetarist. If prices and the growth in goods and services don't rise in line with the growth in the money supply then the remainder must go into savings -- specifically the savings of the oil producers. These countries then loan it back to the oil consumers to finance their consumer spending. As long as the increased quantity (of primarily dollars) is kept stashed in surplus in the oil producers, inflation will remain benign. If these countries desire to spend it then the purchasing power of that currency must slide. The great danger starts with a trickle because if those holding vast quantities of dollars fear a devaluing of their reserves then they will rush to store it in another foreign currency.
What you see on the horizon is no mirage, its the formation of the worlds next reserve currency.

"The only things pushing up prices in Britain are high oil prices"

Agreed there are some second round effects of oil prices but a high oil price is primarily a symptom not a cause of inflation. Those petrodollars are useful for buying up FTSE and NYSE listed companies after all.


Posted by assetpriceinflation at November 11, 2005 04:50 PM
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