Comments: Bank's credibility gap over 'true' measure of inflation

David:

You want a great measure of inflation? Take a look at college tuition. It represents food, energy, healthcare, wages, infrastructure repair,etc. It is the cost of running a small city. By that measure, inflation is running 5-7%.

John "Jack" Williams, one of the darlings of the internet, uses methodology to calculate inflation that, by many, seems old fashioned. What it provides is an apples-to-apples comparison. I've heard some criticisms of his work, but he puts inflation at 7-8%.

One thing I am confident of is that it is NOT anything near the ridiculous numbers coming of the government bean counters. Their credibility is already lost to those who are not being willfully obtuse.

Best regards
David B. Collum
Professor of Chemistry and Chemical Biology
Cornell University

Posted by David B. Collum at September 3, 2006 03:48 PM

David

The CPI is derived from the GEOMETRIC mean of a set of prices for commodities purchased in different parts of the country.

The RPI is derived from the ARITHMETIC mean of a a set of prices for commodities purchased in different parts of the country.

The geometic mean of a set of data will allways be less than (or if the data all have a value of 1, equal to) the arithmetic mean.

It is therefore inveviatable that given the same set of price data that the CPI will be less than the RPI.

Now isn't that convenient.

Rhys

Posted by Rhys G Williams at September 4, 2006 11:15 AM

However, the index presented is not the geometric or arithmetic average of th basket - it is the change since the start date in the relevant average. In this case, the geometric average deals better with the kind of problem we have been having in a number of sectors such as furniture. After the sales, retailers try to rebuild margins. In current competitive conditions, this is accompanied by falling volumes. As the Index is, within the year, fixed weighted, the RPI arithmetic index incorporates the price change to rebuild margins as if there was no such thing as elasticity. A geometric mean-based index handles the elasticity effects of price changes better than an arithmetic mean based index.

Therefore, on technical grounds, the type of calculation is better for the CPI, but the big problem is the exclusion of much housing and council tax from the index. We had the RPI and RPIX running parallel for some time, which people could use as the differences were readily explainable. RPIX only useful for monetary policy geeks, RPI for everyone else. Fine. However, CPI presented as the only measure of inflation just excludes too much of spending to be felt reasonable, however sensible it may be as a policy tool to exclude items that are the direct results of policy changes.

Posted by Paul Bivand at September 5, 2006 12:59 PM

You state "The CBI reported last week that August was the best month for retailers since December 2004. There is a caveat - the survey straddled the base-rate rise - but there was undoubted strength. That simply would not be happening if prices were rising faster"

Is this necessarily so? In Weimar Germany anyone with a wheelbarrow of notes was keen to spend it as fast as possible on an apple lest they could only afford half an apple a day later. Admittedly this demonstrates inflation in extremis but the notion that things will be more expensive in the future can bring forward a purchase. In fact, this very notion may be contributing to the growth in house prices, which has been above wage growth for some years. Potential purchasers feel compelled to stretch themselves because the window of opportunity to become a homeowner may be snatched away from them if they wait.

Posted by Benjamin Walker at September 6, 2006 06:39 PM

Nice point! I was making the simple point that if real incomes are falling people would be unable to spend. But if we've got a touch of Weimar the Bank really is in trouble.

Posted by David Smith at September 6, 2006 07:40 PM

Why was the TV license removed from the CPI basket of goods recently? Oh yes it went up in price quite considerably.

Surely this is a good thing to have in the basket as most households have to buy one! ?

Posted by Rev at September 18, 2006 09:58 PM

It was removed because it has been reclassified as a tax and the CPI does not include any taxes, except when they are included in a prices, such as VAT or excise duty. The licence remains in the RPI. The CPI includes cable and satellite television subscriptions.

Posted by David Smith at September 18, 2006 10:19 PM

>> It was removed because it has been reclassified as a tax and the CPI does not include any taxes, except when they are included in a prices, such as VAT or excise duty. The licence remains in the RPI. The CPI includes cable and satellite television subscriptions.

What a fortunate time to reclassify it.

Posted by Rev at September 18, 2006 11:38 PM

I think there is huge merit in a True Inflation Index in addition to the CPI/RPI. Sure, we need these to get a picture of how much the TV licence costs (earlier comment) and there is merit in knowing what a large balanced basket costs. But it doesn't get to the heart of the problem. How much are our savings and pensions worth? Do we really think that the Government can run up such huge debts, spend so much and tax so much without diluting the value of the pound?

My view is that we need to measure the way the Government handles the economy (43% of it!) by constant reference to a True Inflation Index of the things we need to spend every week for austere ration-book existence. Is this basic cost of living moving up or down? Of course, personal rates of inflation are as varied as we are so we need a bottom line. It is all explained at my petition: http://petitions.pm.gov.uk/trueinflation/
Do look and sign if you agree.

Sincerely,
Mrs M A Westrop

Posted by Mrs M A Westrop at February 6, 2008 12:09 PM