An economic illiterate writes again
Inflation. No one I think is in my tree, I mean it must be high or low. I can’t reconcile the perception with the reality on this issue. Take a look and see if you can help.
The government moved urgently yesterday to open talks on three-year pay deals in the public sector, initially focusing on teachers, nurses and the police, as it began a determined effort to contain inflationary pressures.
Hard-pressed households faced more misery last month as food costs soared to record rates in February.
Household water and sewerage bills are to increase by 5.8% on average across England and Wales.
Five of the six big energy suppliers have announced significant price rises since the start of the year.
Motorists face paying a new high of 103.3p for a litre of petrol - beating the previous record of 102.92p set on Boxing Day.
Passengers and rail user watchdogs reacted angrily yesterday to “outrageous” new year price increases which will see the cost of some train tickets rise by almost 15%.
And here’s number on on New Labour’s ‘top 50 achievements since being elected in 1997‘
1. Longest period of sustained low inflation since the 60s.
So, if inflation is low, why are we paying through the nose for just about every necessity right now? I know the actual number is low, but how does that help when we’re coppering up at the checkout?
Posted on March 10th, 2008 at 4:23 pm
| See also • Listening and learning by rote • Financial dunce writes again • Politician misrepresented, not many dead |
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Well, you know, there’s (monetary) inflation, there’s (price) inflation and there’s (wage) inflation - so it is entirely possible for inflation to be high and low at the same time, provided you’re careful enough to never specify which you’re actually talking about. I suspect they’re talking specifically about wage inflation, which they have managed to keep fairly low (by “containing inflationary pressures” - i.e. not giving anyone a raise). You’re mainly talking about price inflation. As for monetary inflation, I’m not sure anybody actually knows any more… There appears to be a lot of money in the system (I think), but how much of it is actually real and how much of it is in Faerie Gold is a big question.
Plus, this is the gang of nuts who thought Tony should get a Nobel Peace Prize for helping start a war. Internal logical consistency is not their strong point.
To give them their due (much as I’m loth to), they’re clearly talking about price inflation. This is measured either according to CPI or RPI depending on whether you count housing costs (not counting housing costs is fairly sensible in a country where more than half of people own their house and therefore both don’t have to pay rent on it, and actually make more money if its price rises), and both CPI and RPI are historically at fairly low levels.
Yeah, I know john, I was just being sarky… The real problem (well, for wage-slaves anyway) is the divergence between price and wage inflation. Given that I haven’t seen a raise of any kind in 3 years and that my boss claims not to believe in inflation, even historically low levels can become problematic.
Have a look at this file - it gives price inflation for lots of different types of goods. Page 8 is a good summary of which goods have become more expensive and which cheaper since 2005.
But in short, the price of making stuff is continuing to fall, while the price of raw materials is rising - so clothes, ‘communications’ (media plus electronics) and recreation are down, food and energy are up quite a lot, and most other things are up a bit.
The individual indices are then weighted based on the % of spending that they make up, to come up with the overall figure. Since the amount we spend on the price-rising-lots things more or less balances out the amount we spend on the price-falling things, the net result is ‘prices up a bit’.
So the way to personally experience lower inflation is to spend a higher proportion of your income on consumer toys and less on food and staying warm? That’s brilliant! Time to apply for a new credit card methinks… Low inflation, here I come!
John B, excluding housing costs on the grounds of widespread home ownership is a con. It’s not like home “owners” don’t have housing costs: most of them are mortgaged to the pommel. What’s more, the only way they can access their nominal profits is to sell up and move - but everywhere else has risen in price too! The truth is that 90% of the population are borrowing their residences either direct from the bank or from someone else who’s borrowing from the bank; and most of them are spending a third to two thirds of their income to do it. Housing costs matter.
“the only way they can access their nominal profits is to sell up and move”
Me: “I bought my house for £80,000 with a £60,000 mortgage, now it’s worth £200,000. Will you lend me another £40k against the house to spend on booze and hookers?”
Bank: “yes, that sounds like a very good idea, even if you waste all the money and house prices fall 40% we’re still not facing any default risk”
I get your point that, if people don’t smooth consumption over time by either getting long-term fixed-rate mortgages or by getting mortgages which allow them to pay more of the capital when interest is low and less when it’s high, they face real constraints on their actual purchasing power. However, factoring the results of people’s attempts at financial speculation into the headline inflation figures - which is what happens with RPI - doesn’t seem an especially sensible way of dealing with this.
Accepting that most people aren’t in a position to make sensible decisions about credit or forecasts of interest rate volatility, and therefore trying to shift them onto 25-year fixed-rate mortgages instead of allowing their income to be so heavily dependent on credit market fluctuations, would seem like a better approach.
Me: “I bought my house for £80,000 with a £60,000 mortgage, now it’s worth £200,000. Will you lend me another £40k against the house to spend on booze and hookers?”
Bank: “yes, that sounds like a very good idea, even if you waste all the money and house prices fall 40% we’re still not facing any default risk”
This summarises the “bang for buck” depression that’s about to hit us. Google Trinity College and a speech given tonight by a UK financial expert who has no agenda.