Friday 5 January 2007

Labour's Inflation Lie, part 2

Inspired by an excellent article in The Telegraph today, I wanted to draw your attention to a gimmick they have which is actually quite useful. They provide a calculator in conjunction with Capital Economics (the hawkish one of the professional economics houses) that calculates your inflation based on your spending, here it is.

My rate was 5.8% for November 2006, an increase of 0.3% over October alone. Sadly my pay review is based upon the RPI rate of 3.2%.

This calculator at least can give one a reckoning of the real costs increases they face. It also shows up the flaws in CPI. The CPI basket is now deeply flawed as a tool for estimating inflation. So bad that the ONS is going to bring our a similar calculator to this one (great, more public money spent where private money has already provided a solution).

One final key point that arises from this is that it occurs to me, not only that the working, property owning, family raising people are most affected by inflation (along with property owning pensioners); but that as usual the feckless who have no rent, possibly no job and spend their money on short-term material goods are rewarded with a near deflationary environment. Where is their incentive to change behaviour?

How galling it is that government policy come to be so skewed to traditional Labour voting classes, even in what should be a neutral system of calculating inflation. Don' t just blame the EU for inflicting CPI on us; the ONS chooses the basket and has done a terrible job (see previous posts in the archives).

8 comments:

James Higham said...

The Consumer Price Index fails to account for products and services that have been inflated out of existence, the government must fudge every time there is an improvement in a good or service, the “market basket” was reformulated long ago and the CPI fails to report products and services whose prices are reduced by government subsidies.

Is that what you mean?

CityUnslicker said...

Yes. Also though the actual CPI is fixed by disproportionately weighting various inputs. I.e. Energy costs have a low percentage whilst spending on disposable electriacl goods has a relatively high weighting. This has a huge effect on the overall calculations.

Jeff said...

I have thought for a long time that a different type of maths was used when calculating how much the government taxes and spends. The only way I can see them doing it is using fuzzy maths, a derivetive of fuzzy logic. where degrees of truth are often confused with probabilities.

CityUnslicker said...

Buster - not far off I think!

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