Thursday, 15 May 2008

Lies, damned lies, and - Government Inflation Figures

Inflation has been much in the news recently. It will probably feature frequently enough it the months and years to come. It is of course an official government measure despite it’s (probably intending to) sounding like it could be done by Which. The Consumer Price Index (CPI), Apparently annual inflation – the Government’s target measure – was up from 2.5% in March to 3.0% in April.

Not all that much one might imagine. And what is inflation anyway? Inflation is rising prices and costs. Anything that puts up a cost, such as an increase in road tax, or the cost of electricity, or the cost of your mortgage. Effectively it means your money is worth slightly less. You can also get the reverse.

So an accurate measure of inflation really tells you something about what is going on in the economy. The only trouble is the government figures are effectively a lie.

In almost standard New-Labour operating rules the measure and the target have become all important. Reality seems to come a poor second. They are basically fiddling the figures, like they do with ‘A’ level passes and it seems, almost everything else.

The official measure of inflation depends on what particular prices and costs are being officially kept track of. If they aren’t being measured then they don’t contribute to official inflation figures. If you only kept track of the price of video recorders and Ladas for instance inflation would probably be pretty low, maybe falling.

The real inflation experienced by us all in our daily lives bears little resemblance to what the New-Labour amusingly attempt to claim are accurate figures. I expect they will have arguments marshalled to justify why they leave some things out and measure others, probably almost as good as those Gordon Brown used to deny the promised referendum on the Lisbon treaty.

As disposable incomes become squeezed, people are increasingly forced to limit their spending to essentials like food, energy, housing. These are the things going up the most steeply. As our spending shifts more towards “non-discretionary” items and services our experience of inflation also get worse. If you spend a larger portion of your income on energy bills, for example, you will then also experience a much higher rate of inflation.

The index is also biased towards relatively cheaper goods like clothing, CD players, etc. rather than more expensive services like transport and childcare.

Who cares how much a new flat screen TV costs when they can put the purchase off, you have to buy groceries and have the energy to cook them. You may not be able to avoid paying for child care if you want to work. You need petrol to get to work. The rate of inflation as experienced by many households in the UK is probably multiple times more than the official figure.

Probably the CPI's worst omission is that it doesn’t factor in domestic costs like council tax and mortgage interest. There will not be many people who’s council tax has not risen well over inflation over the past 10 years.

Oh – and if you try to save for a rainy day inflation slowly (or maybe not so slowly) eats into your savings.

At just 2% it will reduce the value of £5,000 put away to £4,712 after just 3 years and that's with inflation of 2%. Imagine what's happening to your savings if your personal inflation rate is running at 5%, or even 10%. If the return you are getting on your money is less than the inflation you experience you might as well spend it all now because it will have less buying power later.

3 comments:

Selena Dreamy said...

“The only trouble is the government figures are effectively a lie....”

...and they have been, for.... well, decades!

When house prices were increasing by about 10, 15, or 17% in large areas of the country, the official 2 or 3% inflation may have reflected the viewpoint of the government, or of the financial institutions with which they were associated, but never the truth.
Frankly I’m amazed.
The rule of economics is the one law no government can break, and while I am perfectly of your opinion concerning various governments’ endemic untruthfulness , I think it perfectly matched by this nation’s astonishing credulity if not actually so deserved!

D.

Phil A said...

Selena, No argument with you there. It has been like that for years in one form or another and I am constantly staggered at the microscopic attention span of the majority of the public, their inability to recall broken election promises and 'initiatives' that just sink without trace...

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