Comments: Unchanged at 2.1%

The CPI is nonsense. It makes no sense because the basket of goods and the method of measurement produce figures like this that have no relationship to the inflation experience of a typical British family. How is it possible that the extremely large increases in food prices that have occured over the past year have not affected the inflation rate? Likewise oil? If this continues even the compliant middle class might start to suspect that the system is rigged; they probably will not speak out though - the last thing they want are rate increases and falling property values.

One wonders how bad the housing market needs to get before the government decides to put house prices back into the index so that the inflation rate can be constrained to off-set the feed through effects from food, oil, and the declining ? Make no mistake, Brown is certainly capable of chicanery of this sort.

Another thing - if inflation had been measure fairly over the past decade, and if the government did not lie about population statistics, one wonders what the real growth in per capita income would look like. Of course GDP expands rapidly when population increases rapidly due to immigration.

Tough times ahead for UKPLC and for the mendacious government. Every trick will be used to keep the inflation rate down and room for further rate cuts to hold the centre together. The centre, however, can not hold.

Posted by Gumbrell at January 15, 2008 10:07 AM

2.1%? Quite frankly I'm amazed at the bare faced lies from the government back ONS.

How depressing.

Posted by Dan at January 15, 2008 10:12 AM

What are you guys talking about?

Are you saying that the professional statisticians at the ONS are quite happily fiddling the books to keep the CPI down and the Government happy? They weren't doing a good job of that then when it hit 3% last year.

Go and read all the technical papers that the ONS has publicly available about how it is all calculated, the weights that are used for each segment of consumer spending and then come back and suggest where they've fiddled the books.

Posted by Paul C at January 15, 2008 11:22 AM

Petrol and Food, lifes necessities - I have a choice about buying new kitchen cupboards, I don't have a choice about eating or buying fuel to keep warm, and get me to my place of work.

If all goods are transported using fuel for example and food inflation is prominent and petrol up 10% recently HOW on earth can you arrive at CPI of 2.1%.

The whole concept of CPI is that it does not reflect the rising cost of LIVING in this country (I don't need a kitchen cupboard to live)

Posted by Dan at January 15, 2008 11:30 AM

It depends on the state of your kitchen cupboards!

But seriously - are you suggesting that we should be using effectively a 'cost of necessities' index rather than an average price index?

It is annoying that necessities such as fuel and food go up, but they are only a proportion of everying we spend our money on. I'm actually in the process of buying a kitchen at the moment, and if the price of units goes down by 1% it will save me more than enough to pay for the extra price of bread and cauliflowers (which they rather specifically mention in their statement.)

The point is that unless all we consume is necessities, the fact that the price of these is rising quickly is annoying, but there are lots of other things that we spend our money on that aren't.

Posted by Paul C at January 15, 2008 11:43 AM

The fact remains that I do not need a kitchen cupboard to live.

I need to get to work, I need to keep warm, I need to eat - and it's these items that are swallowing more of my take home pay, buy a significant margin - we need to recognise we're not talking abour a few pence here and there, we're talking about WAY above the governments 2% target on CRITICAL items.

These are the items that matter when it comes to living, it doens't matter if my groceries sit in a bag on the kitchen side, or even the floor.

Posted by Dan at January 15, 2008 12:00 PM

I agree that inflation is hitting hardest on the most important items, and the ONS do publish these figures. See page 4 of The inflation rate for food is 5.4% and transport 5.8% - it's just that CPI gets all the press.

However, CPI is an average measure of prices across everything that we spend our money as a population, which includes people who don't drive, people who pay for private school, people who buy kitchens.

If monetary policy was only targeted at inflation of necessities then all those other sectors of the economy who people work for would be in real trouble.

Posted by Paul C at January 15, 2008 12:13 PM

I certainly accept what you're saying in your last paragraph, but with clothing, utilities, petrol and food alone having such significant rises, I find it impossible to believe the fact that you can offset that against such non critical items, and then still come out with a figure that basically accomodates rate cuts in February.

Posted by Dan at January 15, 2008 12:24 PM

It's a good question - the answer can be found at: in table W1.

This shows that food makes up 10% of the index, fuel 4%, clothes 6% and housing 11%. This is because these weights are roughly the total proportion of expenditure on those goods across the whole economy. Obviously different people have their own proportions.

You'll be annoyed though I imagine that restaurants and hotels make up 14%.

Posted by Paul C at January 15, 2008 12:39 PM

A good defence from Paul C against a familiar attack. It is the case that a consumer prices index based on necessities would have shown very low inflation for most of the past 10 years, particularly food prices. Between 1996 and 2005 food prices rose by less than 1% a year. The apparent high weighting for restaurants and hotels is because it includes canteens and fast-food outlets. For those who don't like the CPI there is always the RPI or, even better, RPIX.

Posted by David Smith at January 15, 2008 04:26 PM

Interesting this claim that inflation is 2.1%. Speak to any of my clients and they say 4-10% but there we are we won't go there again eh David as you told me off about this before?

Posted by Pete Balchin, Solicitor at January 15, 2008 07:20 PM

A solution for Dan and Pete Balchin - how about if we all had indiviudal interest rates, related to what we believe our individual inflation rate to be. Presumably, on that basis, some would now be paying 9% (Pete's clients) on their mortgages and others 1.0% (Paul C)

Assuming that a weighted average of personal inflation rates would balance out at 2.1%, I would think the weighted average of personal interest rates would work out at an average of 5.5% Bank rate too.

There you go, problem solved. Small matter of logistics I agree, but maybe that would placate these guys....

Posted by Simon at January 16, 2008 08:04 AM


To what extent does the CPI (or even the RPI) take into account the following factors:

1. In a recession or slowdown, consumers will tend to redirect their spending towards essentials. Is the weighting figure of these items/services adjusted sufficiently quickly so that if these are inflating more quickly, this will be properly reflected in the inflation figures over the short term?

2. We all know that the effective inflation rates for various groups in the population vary, but that the CPI or RPI figure reflects overall spending in the economy. However, we also know that income inequality has widened quite strongly in recent years. So if the richest 5% are far richer and are spending all their money on non-essentials which have a different inflation rate, then this will be weighted increasingly heavily but will not reflect what most of the population see. Is there a way of estimating the inflation rate seen by the 'poorest' 90%? I don't suppose the richest 10% really notice, simply because so much of their spending is discretionary.

Posted by HJHJ at January 16, 2008 12:34 PM

I think you need to look at the way these indices are constructed -- the ONS website has all the information. The weightings are adjusted annually which in general means that inflation figures tend to overstate actual experience, because they don't take into account short-term switching behaviour. In the present situation that effect may be running the opposite way, though even there you'll get people switching energy suppliers and moving from those food items rising fastest in price. On your other point, it is not the spending weight of richer families that matters but their share of the population. The household sample on which the baskets are constructed reflects typical spending patterns across the whole population.

Posted by David Smith at January 16, 2008 02:50 PM

"The lull before the storm" you said. If as your disbelieving bloggers say, inflation is higher than the ONS numbers (no index is perfect, often playing catch up) and the previous post implied a recession - then we have the recipie for for stagflation, dont we?

Can we have a post on your opinion about the prospect of stagflation? And what can we as a country do to avoid it, if its not too late. I see that as the biggest monster of them all and wonder if there is any vaccine or pre-emptive action possible.

Posted by Londonsen at January 17, 2008 03:24 PM

We had stagflation in the mid-1970s, when inflation hit 26% and the economy was in a deep recession. It is an insult to the term to use it in the present context, when inflation is between 2% (CPI) and 4% (RPI) and the prospect is of a slowdown in growth but not a recession. So I think you should try to get a bit of historical perspective on these matters.

Posted by David Smith at January 17, 2008 03:33 PM

Quite agree with David. We are nowhere near a state that could justly be called stagflation given that terms previous usage, even if true inflation is running at a higher level than the official stats suggest.

There is however good reason for the increasing use of the term in the press. There are strong inflationary forces afoot in the commodities markets. Grain and wheat have gone through the roof, as has oil. Base metals continue a (frequently interupted) upward march. Broad money grows very rapidly still in most currencies, but the credit crunch is now balancing the impact somewhat as credit growth is restricted. Producer price inflation is alarmingingly high. If the US goes into recession (maybe already is), but commodities continue to increase at alarming rates, then a real threat of stagflation may materialise, even if it is not on the scale seen in the seventies.

It's a big 'if', because economists would expect to see inflationary pressures squeezed out by corrections in the commodities markets if the US has a serious recession. If this doesn't happen then the economic models that western governments and central banks use will start to break down, just as the old Keynesian models did in the seventies.

Posted by T Gumbrell at January 17, 2008 10:35 PM


Surely stagflation refers more to the relative levels (and direction) of growth and inflation, and the problems they pose, not absolute levels?

The problem in the 1970s was that we had low growth but we couldn't cut interest rates to stimulate growth because of the inflationary impact.

Currently, inflation is above target and further inflationary pressures may mean that the BoE can't cut interest rates even if (as some predict) growth stalls or we have a recession.

That would be a stagflation problem, wouldn't it?

Posted by HJHJ at January 18, 2008 11:35 AM

It would be a dilemma, and indeed it was the one Sir John Gieve talked about yesterday. But, as I say, it would be a travesty to call it stagflation.

Posted by David Smith at January 18, 2008 03:55 PM

Unfortunately, for the Sheriff of Nottingham, the Debt Management Office has let the cat out of the bag. Psst, don't tell the public sector workers.

"The UK was one of the earliest developed economies to issue inflation-indexed bonds for institutional investors, with the first index-linked gilt issue being in 1981."

"Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (also known as the RPI)."

Posted by Mark at January 20, 2008 12:22 AM
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