Monday, January 07, 2008

How Accurate are the Inflation Figures?

We are told that inflation is running at around two per cent, yet for most people it is far higher than that - particularly those on low incomes. With fuel increases in double figures and council tax rises at least double the official rate of inflation, pensioners in particular are hard hit. The price of electrical goods is tumbling, but how often can you buy a recordable DVD player? Mortgage costs are also not included in the official figures, and I know from my own experience the level of mortgage inflation at the moment.

When people see the inflation figures and then compare them with their own experience it adds to people's scepticism about anything they are told by government. Perhaps now is the time for a cross-party commission to examine the accuracy of inflation figures and come up with a more accurate way of calculating them.


Old BE said...

We used to use RPI figures which purport to record how much of a payrise people need to maintain their standard of living. That is running at about 5% but will come down when mortgage rates do. The CPI is a EU-wide harmonising measure, and as such deliberately excludes things which are hard to measure across 27 countries so things like housing costs are missed out.

Brown switched to the CPI so that he could ease the inflation target but still appear to be "tough", the inflationary boom and consequent bust are direct results of this.

Under John Major the inflation target was 2.5% or below on RPIX (RPI excluding mortgages) but now RPIX sits at something like 4.5%. Brown's claim to be the King of Stability is a nonsense.

Anonymous said...

Iain, you must have short memory. The other inflation index that does include mortgage costs amongst others is called RPI which is running at over 4%. Mr. Bean switched to CPI for some technical issues but also for PR reasons.

Patrick said...

...and remind me which politician it was who decided we should change from RPI to CPI as it would be 'more reflective of people's actual experience of inflation'?

Oh yes - it was the snot gobbler covering his behind in the same month that he mendaciously redefined 'the full economic cycle' to paper over the fact that he failed to save a single penny during the economic growth phase and that we are now looking at a downturn with no cash in the kitty and horribly high national debt.

Just as well then that all the money spent on public services has yielded such value for money with greatly improving standards of delivery, competence and efficiency all round.

Anonymous said...

Isn't the Gordo CPI inflation figure based on a basket of groceries?
If so then it should be far higher surely?

Anonymous said...

Yes, Ed, but that inflation target was *never* met when JM was in office and, in fact, RPIX was 3.2% for November. Not great, but susbtantially less than your claim.

Anonymous said...

You'll hear zanu-labour parrots trotting out their 'low inflation' mantra ad-nauseum.

Of course, what they actually mean is that 'wage inflation' has been kept brutally low whilst 'cost inflation' (petrol, gas, electricity, council tax etc) has rocketed over the last decade.

New Labour have jumped in to bed with big business at the expense of the very lowest earners who are their greatest supporters.

Anonymous said...

The first two comments are helpful here. There is also a pensioner specific inflation index (from memory it is called the Rossi index) which uses typical pensioner expenditures as weights. It is rare for pensioner RPI to vary from std RPI by more than 0.1% or so.

Remember that saying inflation is too high is to say that interest rates should have been higher over the last year or two. That case can be made, but be aware that UK interest rates are some of the highest in the world already over the cycle, and that calling for higher interest rates is rarely popular.

Tim Leunig, economist.

Anonymous said...

It's the wrong question Iain - better to ask how representative the inflation figures - generally taken as the Retail prices index (RPI) - are of people's expenditure patterns and experiencves as a whole.

Everyone spends their disposable income in different ways, so there is no single figure that will be truly representative for everyone. As a (lapsed) economist I could bore for England about weighted averages etc - but the important thing to remember is that RPI is simply a snapshot figure of a weighted 'basket' of goods and services. Like any snapshot, it is a generalisation, and everyone can say 'well, its not like that for me'. And because statisticians are as ever somewhat behind the curve, the figure is always immediately out of date and thus not reflective people's current experience of prices in the shops, at the pump or paying household bills. For example, recent price hikes for fuel and energy are not yet fully reflected. And those of us who live in rural areas and drive more are harder hit by the massive hike in petrol and diesel (filling stations should really be run by HMRC as they are really surrogate tax collection centres). Commuters crushed by train fare rises won't see that in teh figures for a while to come.

And indeed, there is a real debate to be had as to whether the weightings of various elements of RPI are truly representative - do changes in fuel prices, utility bills, interest rates get adequately reflected in RPI movements? The inevitable answer is, no, not for everyone, as a 'global' figure will, by definition, not reflect individual people's experiences. So maybe there should be a series of indices which more fully reflect price hikes 9and drops where those occur, as in electricals) to make the numbers more transparent and related to people's lives.

However, there have been real difficulties with Govt statistics recently as has been well documented; and it may well be time to take a close look at how the inflation numbers and other measures of the economy are constructed and how well or badly they relate to 'real life' as opposed to the fictional economy inhabited by current Govt ministers!

So Govt clearly has an interest in keeping the figures as generalised, as unrepresentative and as fallacious as they can do. Anyone watching Gordon Brown, when chancellor, gabbling through interminable lists of numbers in his speeches which bear no resemblance to the real world will recognise that he is a past master at obfuscation and misrepresentation, and statisticians are well versed in being abel to produce figures to prove anything you like (look at the contradictory data on global warming for example).

In short, the figures will be accurate - but deeply unrepresentative and as such misleading. And govt - of any colour - will fight tooth and nail to keep it that way.

Old BE said...

Armchair, not strictly true: I believe that inflation was falling rapidly towards 2.5% (and let's not forget where it started from in 1979) and was met in May 1997. It has been on the upswing ever since Prudence with a Purpose got in.

Shame Brown never knew a jot about economics or he wouldn't have got us into the mess.

Oscar Miller said...

New Labour have jumped in to bed with big business at the expense of the very lowest earners who are their greatest supporters.

And to make matters worse in April the brutal abolition of the 10% tax rate for those on low incomes will take effect.

Unsworth said...

I agree with others here. If you change the method then you change the figures. All Brown had to do was look around for another Index which would present his position as being wonderful. The question is why might he do that?

It's the usual smoke and mirrors garbage from the Government. They could quite easily have maintained the old system, but under the guise of 'harmonising' they've adopted measures which bear almost no relationship to reality.

As you say, Iain, how many DVD players are we expected to buy per year? Energy (of all types) and food costs are roaring ahead. Maybe we should be glad that global warming will possibly reduce winter energy consumption.

Man in a Shed said...

ed (January 07, 2008 10:20 AM) is right. There already is a better way of calculating inflation.

You'll notice that RPI is +4%, private sector pay increases are at +4%.

So public sector pay is really being cut by over 2% (police take note).

Far enough - if the government finances are bad. (I've had 0% pay rises in my career in the private sector when the company did badly).

What lacks courage from Brown is that he won't say this is what he is doing. Mrs T would have just told us straight, adding TINA. People didn't like what she said, but the respected her for being straight and then when she was proven to be right she gained the sort of credibility for courage and conviction that Gordon Brown can only write about.

PS See here for comparison for CPI and RPI rates

Anonymous said...

"The price of electrical goods is tumbling, but how often can you buy a recordable DVD player?"

Astonishing that you don't seem to understand the concept of a weighted basket of goods....

Anonymous said...

I have just done a google search to find the differences in CPI and RPI and cannot find a factual list for either. Most so called expert explanations give the same for both. Take a look at Wikipedia for example.

Anonymous said...

Furthermore, I think we should be concerned about the way in which Brown uses these and other statistics. He has this (irritating) habit of repeating, repeating and repeating again any point until he is sure that the (dumb, stupid) listener has got the message. Sadly, this is one propaganda technique that does work.

Fire, as they say, sometimes needs to be fought with fire. We need a Conservative spokesman who is prepared to adopt exactly the same technique in response. Not a welcome task as it won't do much for said person's popularity. But unless there is a grindingly repetitive response to the Brown propaganda then, in the public mind those dodgy figures and claims are accepted.

Incidentally, regarding this morning's policy statement about free health scans, what's the betting that this is rolled out in Labour critical seats long before it hits the Tory heartlands?

Machiavelli's Understudy said...

Brown uses CPI for statistical propaganda, but when it comes to charging interest at the "rate of inflation" on student loans, the thieving bastard conveniently charges at the RPI rate!

Anonymous said...

Tories are planning an independent office of national statistics, according to bbc report flagged by guido

Anonymous said...

Excellent post Iain. I've been known to disagree with your views, but you have it right here. Buzzing :)

CityUnslicker said...

Iain, this is an extremely prescient point to make this week; with a decision on interest rates due on Thursday.

Colin raises some good points.

teenage girls buying clothes and ipods experience very fast falling inflation. Pensioners paying energy bills face the opposite.

However, if inflation is higher than CPI suggests, then reducing rates is a crazy move...and yet that is what might just happen.

Also, for the record, we moved to CPI from RPIX to get in line with the Euro-area countries, not for any other reason!

Anonymous said...

I 'think' that the cpi excludes tax changes and the snot gobbler has increased taxes enormously, reducing disposable income. People's perception of price increases is therefore affected. (Council tax has increased at double the rate of inflation over the last ten years, and reduced the spending power particularly of those on lower and 'fixed' incomes such as pensioners.)

The Huntsman said...

You are right to raise this issue.

We as a family have certainly noticed in the last six months rises in the prices of what one might loosely term 'supermarket essentials' of 10-20%.

I simply do not trust the ONS and Treasury figures which bear little resemblance to our real life experience.

I posted on this in December @ &

Given the all-pervasive effect of fuel price rises of the scale there have been, I find it impossible to believe the current figures. I am old enough to remember the effect of the 1973 oil crisis and what happened then to inflation and, though I admit to being a bear of littl economic brain, find it difficult to believe we can avoid a similar rise in inflation this time.

If lies are being told and the truth is otherwise, it is a truth that is impossible to hide. Everyone has to pay higher prices for staple goods and if they think that GB is being economical with the truth, it will do him enormous harm electorally.

Don't let this one drop!

BrianSJ said...
has a calculate your own rate of inflation. Being 8 months behind the Telegraph....hmmm.
Still, with food and energy and council taxes all set to go through the roof, and imports going up as the pound falls, things can only get worse.

Anonymous said...

Well said Huntsman I reckon you've got the figures just about spot on, as a pensioner it certainly relates to my circumstances and I suspect to the great majority of pensioners. With the forecasted council tax rises, soaring energy costs, continuing high price of car ownership we are going to get clobbered once again.
GBs claim of 2% is a downright LIE and needs to be continually broadcast as such (just dont rely on Andrew Marr to do it).

Tapestry said...

Since the Euro launched prices in the zone have trebled. Funny how inflation has never been reported higher than 3% per annum.

funny how inflation seems to have nothing to do with prices any more.

why is gold heading for $1000? and commodities trebling in price? same reason.

Anonymous said...

Firstly, RPI, (and RPIX) and CPI are not the same as inflation, rather they are an attempt to measure inflation by measuring the increase in a specified list of goods and services. Furthermore, increases in tax is not inflation, although it does reduce one's disposable income.

Secondly, its obvious why mortgage costs should be excluded from an estimate of inflation. The (nominal)interest rate you pay is made up of two parts - part is the real interest rate (this rewards the provider of the funds for the risk of lending to you) and an inflation component (to reward the lender for the lost purchasing power ie £100 in one year's time will purchase less that it does today).
If you include mortgage payments in the estimate of inflation then, inflation increase the nominal interest rate which increases the mortgage costs which increases the inflation rate which increases the nominal interest rate etc etc

End of economics lesson.

copydude said...

While it is possible to understand the theory, there seem little sense in a rate that has no relevance to the public.

I appreciate that everyone's experience of inflation is different, but what we have is something that isn't remotely anyone's experience.

Food is a small part of the Index. Yet food prices rose 10% just between June 06 and 07. (Nat. Office of Statistics.)

Since raw agricultural products rose 27%, food inflation can only continue to escalate.

Housing costs are left off. Yet house prices rise 10 per cent a year while mortgage costs are (according to the Telegraph) rising to 20 per cent more than two years ago.

Council taxes have risen around three times the rate of inflation and above the rate every year since Labour came to office. (Total 92 per cent since 1997.)

Petrol prices - fuelling distribution prices for almost any product - have doubled since Blair's War. (Oil was around 30 dollars a barrel in 2003.)

In Labour's ten years, phone and internet bills have risen 77 per cent.

Utility bills . . . do I hear 27%?

Now, how many cheap Chinese DVD recorders would I have to buy to get all my regular expenses down to an average of 2.8%?

(Or if I'm an MP,1.9%)

Actually, it can't be done, since disposable income is at its lowest for 10 years.

As someone said, 'lies, damned lies and statistics'.

Anonymous said...

Rex 11.08 am said...
I have just done a google search to find the differences in CPI and RPI and cannot find a factual list for either.

The details of the basket of goods and services (about 650 items) can be found at

hatfield girl said...

When speaking of inflation the commonsense meaning of the term is disposable income. Most are poorer than they were a year ago. Their rises aren't compensating for their fixed outgoings for food, housing,power, communications, council tax and other imposts, transport and clothing.

All the rest, the various inflation measures, has use but little meaning in the context of everyday well being experienced.

Anonymous said...

They lie about inflation, to try and minimise wage rate inflation. Economically speaking, It makes sense to give employers a bogus low figure to keep pay increases down, therefore, lying about how low inflation is, actually helps keep inflation down, so the government incentive is not just political and employers are happy because they are paying their staff less. The question is, how the government have got away with this lie?. It is that the gap between increases in earnings and true inflationary costs is being met by DEBT or money that might otherwise be saved. 20 and certainly 30 years ago, the government could not have got away with this blatant lie. Most people did not have the access to easy credit, like overdrafts, credit cards, loans etc. As they used to say, "inflation hits the pound in your pocket" if wage increases didn't reflect inflation fairly accurately, people knew about it very quickly. These days they absorb these differences, not only with debt, but with just trimming some of the fat of there consumerist lives, They can get a cheaper car, reduce the number of channels on their Sky package, get slower broadband, buy less food or Tesco's ordinary instead of Finest! An inconvenience, but not that serious to most people. The government worked out that they could get away with this deception, but now the chickens are coming home to roost. The credit crunch will be much harder because of the extra debt that people have taken on to replace inflationary impacts and tax increases. Money that may have been saved has already been spent and will not be available to get the economy through the bad times. Non-wage inflation is now the driving us toward stagflation. Debt won't be so freely available anymore, due the credit crunch, so the cost of real inflation will hit home much harder. Not to mention a seriously screwed up economy

Unsworth said...

@ the nemesis

"Incidentally, regarding this morning's policy statement about free health scans, what's the betting that this is rolled out in Labour critical seats long before it hits the Tory heartlands?"

Maybe, but it'll do two things:

a) increase the budgetary load on Trusts as a result of all these people coming in for scans - which will lead to shortages, closures etc

b) uncover a rich - and so far untapped and unaware - seam of very ill people who will all be making yet further demands on the NHS, rather than simply dropping down dead.

You can see where we're going here, can't you? Now how clever is that for an ex-Chancellor with no cash?

copydude said...


hatfield girl, said...

"When speaking of inflation the commonsense meaning of the term is disposable income."


Very interesting point. Given that disposable income, under Labour, has actually fallen against rising incomes.

Statistics from USwitch base even this net fall on average incomes having risen 55% since 1997.

Now. What's an average income? It certainly isn't that of a pensioner or a public sector worker. And the 'average income' touted by Uswitch (£55,000) is as removed from most people's reality as the 2.8 per cent inflation rate.

We have a debt mountain because most people can't make ends meet, not because of 'rising wages' and 'low inflation' under Gordon.

This makes even more nonsense of the inflation statistic, which is mostly based on discretionary items, only affordable by someone with a disposable income - or access to borrowing.

In the old days, the notional inflation rate was used for two things.

1. To restrict public sector pay rises.

2. To prove what a good job the (insert name of Chancellor) was doing.

It is amusing that MPs are now branded as 'greedy workers' and being asked to accept 1.9%, when we all know that their salaries too have been eroded by at least 10%.

(For the purposes of the argument, I'm leaving out the fiddly Hains and Harmans.)

It will be interesting to see if, as a result, MPs finally blow a hole in this most contentious index.

Doing so is surely key to re-evaluating Gordon Brown's 'performance'.

Anonymous said...

Ian, thanks for making this a Topic. In my humble opinion everybody who works full time should be able to afford a home, keep warm etc. I've said this a thousand times but mortgages 3 x ONE income and a 10% deposit would have kept house price inflation in single figures giving us all money to spend and creating REAL jobs. How simple is it for xxxxx sake.

Unknown said...

All these blogs miss the point that in general inflation figures overestimate the extent of price rises as they fail to take account of the gradual improvement in products which occurs over time. If the new improved Mars bar sells for the same price as the old Mars bar then both the RPI and the CPI will record this as an unchanged price. However us consumers are getting something better for the same price. So stop whingeing.