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Inflation? What inflation?
Did Mervyn King perhaps allow himself a rare smile this morning on hearing that inflation has dropped to its lowest level for almost three years? Did he dance a little jig to celebrate the news that CPI for September is down from 2.5% to 2.2% while RPI has dropped from 2.9% to 2.6%.
True, this is mostly because gas and electricity rises which boosted inflation a year before have dropped out of the calculation. True, CPI inflation is still above the government’s 2% target, as it has been since December 2009. True, this is the month which guides the setting of various benefits such as the state pension next April, which will now rise less than the year’s inflation average. True, prices now seem set to head upwards again. But we must take good news where we can.
Inflation has hit the bottom
For many shoppers, the decline in official inflation figures might seem somewhat puzzling, particularly those – like the elderly and the less well-off – for whom food is a significant part of their weekly spend. We import 40% of the food we consume and food prices in the UK have risen 32% in the past five years, double the EU average.
In the past year, many staples such as beef, carrots, eggs, potatoes and onions have risen sharply in price. With terrible harvests this year, not just in the UK, but in many other parts of the world, grocery bills are set to show steep rises in the coming months.
While this month’s figures are lower because of the working through of previous energy price rises, inflation is about to be pushed up again by new rises in the cost of gas and electricity. Four of the “big six” energy companies have announced price increases and the others are expected to follow suit.
The inflation numbers will also be boosted soon by rises in tuition fees, while the latest figures on factory gate price inflation show an increase from 2.2% to 2.5%, a useful early indicator for consumer price inflation.
Do the inflation numbers reflect your cost of living?
Last year the president of the New York Fed, William Dudley, was fielding questions from an audience who kept grumbling about the rising cost of food. One questioner demanded to know when he had last gone grocery shopping, a question we would dearly like ask Mervyn King.
Dudley defended the calculation of the index, saying that while food and energy prices had indeed gone up, many other prices had fallen. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said, only to be met with laughter and jeers. One wag echoed Marie Antoinette and yelled out: “Let them eat iPads”.
In the USA, the website Shadowstats challenges the official statistics. It points out that progressive changes to the way the indices are calculated have depressed the numbers. If CPI was calculated the way it was in 1990, reckon Shadowstats, inflation would currently be almost 6% while, if the 1980 method of calculation was used, CPI would instead be almost 10%.
Our inflation calculations are set to change
As far as we are aware, there is no UK equivalent of Shadowstats to challenge the official inflation figures where CPI, which does not include housing costs, is usually several percentage points below RPI, which does. It often seems to be the case that when the government is taking money from us, as with student loans, it links to the RPI. When it is doling out money, as with benefits, it prefers to use the lower CPI. Odd, that.
Does anyone, other than us, remember the promise in the Coalition Agreement of May 2010 to change this? It read: “We will work with the Bank of England to investigate how the process of including housing costs in the CPI measure of inflation can be accelerated.”
We’re still waiting.
In fact, what has been proposed is rather different. Instead of the CPI going up to reflect housing costs, the RPI is going to be rigged to come down. The Office for National Statistics has begun a consultation to see how it can better be “harmonised” with the CPI. In other words, how can they change it so it gives a lower number? This will almost certainly see a reduction in returns on NS&I index-linked bonds and private pensions. Linking state pension and other benefits to CPI last year, rather than RPI, is saving the billions so this no doubt seems an excellent way of saving some money. If the two indices can be made almost identical, there’ll be no need for RPI at all.
It is likely to prove yet another way of suppressing returns for savers, many of whom were understandably keen on NS&I five-year bonds when inflation was at its peak.