Fun with numbers: The £18 pint of beer

Friends of the Earth explain how they calculated that a loaf of bread would cost £6.50 and a pint of beer £18 in 21 years time here:

The price of staple foods is set to rocket four and a half times above normal inflation (1) because the changing climate will put extra stress on land and resources around the world, exacerbating the existing food crisis...

Spiralling costs of basics like bread, rice and pasta will mean that many million (2) more people will struggle to buy enough food to keep healthy.

The figures have been produced by Ray Hammond, a leading expert in predicting future social and economic trends and Visiting Lecturer at the University of Oxford's Institute for the Future of Humanity. He modeled the future prices of consumer foodstuffs for Friends of the Earth using previous price hikes (3) recorded by the World Bank and projections by the International Food Policy Research Institute.

Projected prices of other staple foods in 2030 include:
£6.48 for a 800g loaf of white bread (now 72p, would be £1.44 with normal inflation)...
£18.45 for a pint of Pilsner lager (now £2.05, would be £4.05 with normal inflation)

(1) If they assume that prices will double in 21 years anyway, that equates to underlying annual inflation of 3.4% =(2^(1/21))-1. For bread to rise to 4.5 times its current price, the annual inflation would be 7.4% =(4.5^(1/21))-1. So the phrase "four and a half times above normal inflation" was clearly penned by somebody who has no idea what he is talking about; that looks more like "food prices will increase at twice the normal rate of inflation" to me.

(2) At those prices, half the world's population would have starved to death, so they mean "billions" not "many million". Twats.

(3) We know that the price of a loaf has increased a lot over the past few years:
1970 - 9p
1980 - 33p
1990 - 50p
2000 - 52p
2007 - 94p

i.e. it's doubled over the last ten years (annual inflation 7%). So if we use the last ten years to predict the next twenty, a £6.48 loaf is not entirely unfeasible (see also point 4 below).

But the further back you look, the less dramatic the increase. In fact, the price of a loaf increased more or less exactly in line with inflation between 1970 and 2007. So if you use the last forty years to predict the next twenty, we'd expect a loaf to cost £1.44 in 2030.

So far so bad.

I'd guess that the cost of wheat is a large part of the cost of bread, so the price of a loaf must track the price of wheat. But the cost of the ingredients in a pint of beer are negligible - five pence or ten pence, perhaps - the rest is brewing, bottling/canning, transport and taxes. So even if the price of those ingredients went up ten-fold, that doesn't have to add more than 50p or £1 to the price of a pint (assuming other costs and taxes remain the same).

(4) People from Oxford have got form for this, i..e Professor Stephen Nickell who predicted house prices twenty years into the futures on the basis of the last few years' increases and bravely predicted that an average house would cost ten times average earnings by 2026.

Economic illiterates of the day (8)

First up is Prof Stephen Nickell:

A year ago he was bravely forecasting that house prices would rise to ten-times-income by 2026. Six months ago he had toned this down slightly and solemnly told the House of Lords that prices might 'only' rise to over nine-times-income by 2026. Here's the same chap again, solemnly predicting that house prices are now on the slide (oh, so he noticed!). And, apart from being wildly out with his original predictions and not apologizing for that in any way, he appears to think that house price falls are a bad thing: "Families must wait until 2015 for the property market to start booming again". For young couples who'd like to start a 'family' these price falls are a most wonderful thing!
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Next up, Kate Barker:

She is the Government stooge who wrote the Barker Report back in 2004 and came up with the 'target' of 240,000 new homes a year*. The delectable Caroline Flint** referred to this as if it were Gospel in her recent FT interview with the FT:"The need to get up to 240,000 homes a year is as relevant today as it was yesterday and will be as relevant in the future, based on very detailed evidence Kate Barker pulled together demonstrating that we hadn't built enough homes."

Kate Barker has had four years to come out and distance herself from her earlier crap*** - but not much chance of that happening, is there?
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What is so terrifying about all of this is that Prof Stephen Nickell and Kate Barker have both served on the Bank of England's Monetary Policy Committee.

Jumping Jesus H Jack F***ing Flash, with knobs on, are these really the best people they can find?
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* To be fair, there is a lot of useful research in the original report, you can sort of imagine her sitting back and saying "F*** it, what we need is liberalisation of planning laws and/or Land Value Tax" but like that other government stooge Sir Michael Lyons, she only dared mention these possibilities very briefly.

** Yes of course she's an economic illiterate as well - she's a Labour politician, what do you expect? Her bright suggestion is "pressing ahead in the area where she believes she can make a difference - using the clout of public sector bodies to help housebuilders, not only by buying thousands of new-build homes from them, but perhaps by changing payment terms so registered social landlords pay more upfront. The move will be welcomed by the beleaguered industry, even if it is not enough radically to transform its fortunes."

Nice one, Caroline! And seeing as sales of cars, holidays, furniture etc will no doubt fall as well, how about doing something to help the "beleagured" car manufacturers, travel agents or furniture shops?

*** For a pleasing contrast, see Lord Joel Barnett, who has spent half his life "actively campaigning for a reform of his own formula".

"CML predicts 7% house price fall"

Firstly, won't this sort of prediction become a self-fulfilling prophecy? What's the point of buying a house, paying 6% interest and suffering a 7% capital loss if you can rent a house for a typical rental yield of 4%?

Secondly, in calculating this, presumably all they did was stick a ruler on a graph and extrapolate - according to the April House Price Index published by the Halifax/HBOS (one of the CML's largest members), prices are down 5.3% since their peak in August 2007. 5.3% ÷ 8 months x 12 months = 8%.

Finally, although the recent past is usually a good guide to the near future, the recent past is not a good guide to the distant future, which is the mistake that Prof Stephen Nickell made, who a few months ago solemnly swore that house prices would rise at 1.5% a year faster than earnings for the next 18 years*. Has he resigned his cushy taxpayer-funded job with the 'National Housing and Planning Advice Unit' in shame? Nope, thought not.

* 9.3 ÷ 7.07 = 1.32, the 19th root of 1.32, =1.32^(1/19) = 1.015

"Gordon Brown adviser Stephen Nickell fears mortgage rationing"

This Nickell character is a former Bank of England policy maker and professor at Oxford. And, it would appear, either a complete moron or a purveyor of propaganda and lies on behalf of HM Gummint. Or probably both.

A few months ago, he presented written evidence to the House of Lords saying that "...the house price to income ratio would rise from 7.07 to 9.3 by 2026 as indicated in my evidence".

So, bearing in mind that prices had already started falling in the second half of 2007, he can shove his clever formulae up his a*se, either he's a moron who stuck a ruler on the chart...
and somehow arrived at a ratio of over 9 or just as likely, he was being paid to fabricate evidence to support HM Gummint's plan to "build two million homes". The way things stand, home builders have downed tools; I'd love to see assorted cabinet ministers don hard hats and boots and get cracking!

In today's twattish outburst, The Great Economist is whining on about 'mortgage rationing', er, even in a free market, there is rationing - it's called price rationing, the best form of rationing wot is. Again, either he is a moron who doesn't understand this or just as likely, he is being paid to fabricate evidence to support HM Gummint's plan for taxpayer subsidies to banks to try and desperately shore up house prices at their current ridiculous level, because The Goblin King knows too well that Andrew Marr's accusation, that he had ridden on the back of house price inflation and the credit bubble for the last eleven years was absolutely spot on.

h/t Jack C at HPC.