Credible inflation data (for
a change)
Paul Tustain
Jul 21, 2006
It is strongly in the interest
of governments that inflation figures stay low, even if inflation
itself is not low.
An hour or so researching newspaper
stories on "Google" should puzzle those who have read
that UK inflation is - officially - running steadily on target
at about 2.5%.
"Since 1996-07, the year
before Labour came to power, the average council tax bill will
have risen from £525 to £1,053." - The Times
- Feb 20 2006.
"The UK's biggest energy
supplier will raise gas and electricity tariffs by 22% from 1
March 2006. " - www.bbc.co.uk - Feb 17 2006
"A single Tube journey
in zone one will cost £3 instead of £2 while a single
bus journey will rise from £1.20 to £1.50, said Mayor
Ken Livingstone." - www.bbc.co.uk - Oct 2005
"Prices for houses in London were up by 7.2 percent in the
three months between November and February" - www.worleconomies.co.uk
-
"Tesco was the first to announce an increase in its retail
milk price of 2.2 pence per litre, and now all of the major retailers
have followed suit with increases of between 2 and 4 pence per
litre." - www.tumpline.com - 26 January 2006
"Average [water] bills in England and Wales rose by 11.8%
in 2005. This time around, the average increase is 5.5%, roughly
double UK inflation." - news.bbc.co.uk - 30th March 2006
"The price of a standard UK passport is to rise by 21%"
- www.bbc.co.uk - 17 November 2005
"Overall fuel costs for companies were 39 per cent higher
last month than a year before, the sharpest rise since 1991,
according to figures released yesterday." - The Times -
13 Sep 2005
"Other official data paint a slightly different picture
of recent earnings developments. Since June 2005, the ONS has
published a new experimental series: the average weekly earnings
(AWE) measure [+4.3%]... the factors behind that divergence are
unclear at present." - www.bankofengland.co.uk - February
2006
"In 1985 the average annual cost of sending a child to private
school was £1,806 compared to £8,388 in 2005, an
increase of 364%" - Independent Schools Council (ISC) -
August 2005
"The latest data from the ONS says that income tax payments
were 7.5 per cent higher in the year to the end of March 2006
than in the previous year. An equivalent measure of National
Insurance showed a rise of 5.8 per cent over the same period."
- www.telegraph.co.uk - May 2006
"Price of British beef 'to rise by 20%'. The price of British
beef is set to rise after exports to Europe resume next week...Increased
wholesale prices are likely to be passed on from supermarkets
to shoppers, the National Beef Association (NBA) warned. Exports
will resume from May 3, finally ending the ban brought in a decade
ago to stem the spread of mad cow disease (BSE)." - finance.pipex.com
- April 2006
"The average Old Trafford price rise will be 12.3 per cent"
- Manchester Evening News -10th April 2006
"the maximum you'll be
asked to contribute towards your tuition fees is £1,175
in 2005/06 ..... If you are starting a full-time undergraduate
course in 2006/07 you may have to pay a contribution up to a
maximum of £3000 a year" - www.aimhigher.co.uk - 2006
"Premium increases very closely follow healthcare spending
increases over time. Over the most recent ten-year period (1993-2003)
for which data are available, premiums grew at an annual rate
of 7.3 percent, while the cost of healthcare services grew at
an annual rate of 7.2 percent." - PriceWaterhouseCoopers
- www.pwcglobal.com - The Factors Fuelling Rising Healthcare
Costs 2006.
"Price inflation in the private sector for residential care
and some other contracted services (such as repairs and maintenance
of buildings) has also been much higher than the retail price
index (RPI)." - Hampshire County Council - www.hants.gov.uk
- February 2006
"The cost of a UK first-class
stamp has risen by two pence to 32p [6.7%]" - www.bbc.co.uk
- April 2006
"In the past three years,
inflation has risen by 4.6 per cent while the cost of running
a house increased by 14 per cent. Rises in mortgage interest
payments most contributed to the cost of owning and running a
house in 2004/05 rising by 20 per cent to an average of £2,146,
according to the research, which is based on data from the Office
for National Statistics." - www.aboutproperty.co.uk - March
2006
Inflation's moving target
The Bank of England's
Monetary Policy Committee has an inflation target of 2.5%. Previously
inflation was measured using the 'Retail Prices Index', which
was used consistently - so long as interest rates were falling.
When rates rose again they quietly switched to focusing on RPIX,
which excluded interest rates, and then reverted to RPI when
rates turned down. This allowed the most widely reported inflation
figure to enjoy - repeatedly - a one way ratchet of cyclically
falling rates.
The RPI includes neither houses nor retirement income, two of
the biggest expenditures which most people have, and the cost
of both of them were rising sharply through the 80s and 90s.
The CPI
Recently the Bank of
England switched to the CPI, a European standard. It doesn't
include houses or retirement income either. In fact it has an
even more convenient mix of data, and consistently reports a
lower inflation figure than RPI:
"...the RPI covers owner-occupied
costs and council tax and the CPI doesn't although it does cover
new cars, personal computers and air fares that the RPI doesn't"
- www.pcs.org.uk
There is a pattern. The owner-occupied
costs of plumbers and electricians have been increasing because
of many extra costs imposed on their employers, like National
Insurance Contributions and increasing Health and Safety costs.
Council tax has been rising fast too.
On the other hand because of increases in competition from no-frills
airlines European air fares have plummeted.
Cheating with the numbers
Personal computers and cars
are interesting too. The statisticians use 'hedonic' computation,
which means that product improvement impacts the reported inflation
figure. So a basic computer, which doubles in capability every
18 months, is computed as a halving of price even though the
price of a basic family computer does not fall at all.
In the same way a modern day
BMW 7 series (£38,000) on any car criteria greatly outperforms
a 1970s Rolls Royce (£50,000 then). The result is that
in a statistician's spreadsheet luxury car prices fall steadily
over 30 years. In fact a new Rolls Royce has risen from about
£50,000 in 1970 to about £200,000, and a top of the
range BMW by a similar percentage factor.
Yet more exclusions
It is getting increasingly
silly. The new target is 'Core CPI', which excludes housing,
its associated costs and taxes (mortgages and council tax), the
capital cost of retirement income, and now fuel and food too!
It seems improbable that savers will be impressed by this sort
of selectivity indefinitely, unless they believe it useful to
measure the purchasing power of savings only by comparison with
the tumbling prices of imported Chinese clothing and electronic
gadgetry.
Paul Tustain
email the author:
paul.tustain@BullionVault.com.
Paul Tustain
edits Galmarley, the popular free research
site on gold. He recently sold London based SAM Systems - the
specialist banking and risk management systems provider which
he founded in 1990. He consults on risk management within the
financial sector and is well known as a writer, publisher and
TV panellist both on gold and the workings of the financial system.
In 2005 he launched the Bullion Vault service - to improve
the accessibility, security and affordability of professional
grade gold bullion for private buyers all over the world.
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