Tuesday, 14 February 2012

The fall in inflation had NOTHING to do with VAT

From the BBC:

Inflation fell sharply in January as the impact of last year's VAT rise was no longer shown in the figures. Consumer Prices Index (CPI) inflation in the UK fell to 3.6% in January, down from 4.2% in December, according to the Office for National Statistics (ONS).

Nope. If you download the ONS detailed figures from here, the fall inflation was due to the fact that prices actually fell in January by about half a per cent.

And if you rebase the individual figures since January 2010 for VAT-able items (booze, fags, clothing, furniture, restaurants) and for non-VAT-able items (food, housing, health, education), you'll note that overall inflation for the first basket was 8.8% over the two years and for the latter basket it was 9.3%.

We know from our earlier workings using real life figures that only about one-third of VAT changes are passed onto (or benefit) the consumer, in which case we'd expect inflation for VAT-able items to be about 0.7% higher than for non-VAT-able ones before and after a hike in VAT of 2.5%, but it wasn't even that much, it was actually 0.5% lower.

The chart is below, there was no particular jump in the price of VAT-able items in January 2010 or January 2011, which is what they now want you to think:


James Higham said...

Nope. If you download the ONS detailed figures from here, the fall inflation was due to the fact that prices actually fell in January by about half a per cent.

... which, of course, they had no choice but to do, given our current situation.

Lola said...

The 0.5% fall in Jan looks 'The sales' to me. That is heavy discounting by business in a desparate attempt to drum up trade in an econmoy depressed by political cock ups.

Mark Wadsworth said...

JH, presumably.

L, not really. From Dec 09 - Jan 10, prices fell 0.2%, and from Dec 10 - Jan 11 prices went up 0.1%. A fall of 0.5%in one month, even in January, is quite unusual.

Old BE said...

Plus in the markets I was looking at there was not much post-Christmas discounting. However there does seem to be a slow downward grind in the price of what might be deemed "non-essentials". I suspect the world economy as a whole is in quite a steep depression.

Mark Wadsworth said...

BE, the two surprisingly large falls were clothing (down 4.9%) and furniture (down 2.7%), which sort of backs up your assumption.

Dr. Adrian Wrigley said...

A while ago I examined the effect of all the VAT rate changes in the UK on RPI.

It looked to me like the effect on prices lasts only a few months. So a hypothetical 3% rise in VAT rate might add 1% to prior prices in month 1, maybe falling to 0.6% on prior prices in month two, 0.3% in month three, and 0.0% in month four. And similarly for a VAT cut. The effects quickly get lost in the noise. It suggests that supply and demand drives prices, while vendors' costs (such as VAT) don't play much part - contrary to vendor's beliefs and actions. VAT comes out of rents. Rents don't affect prices.

This makes sense if you think shopkeepers are naive about the issue, and mechanically adjust their prices at first, in the logical way. Then the effect filters through the system to suppliers and customers, and prices then shift to reflect the new economic realities.

Examining the immediate effects on online prices from the rise last year, I found support for the idea that brand name products and copyrighted media (DVDs, CDs etc) didn't generally change price, while stores' own-brand products rose in line with the VAT change.

Media/political coverage on VAT changes generally follows the agenda of the people concerned, and rarely do facts get in the way!

Here in France, there was a big campaign to reduce VAT on restaurant food from 19.6% to 5%. The slogan was that lower VAT mean lower prices. Actually prices in restaurants barely twitched when it finally came in. But marginal restaurants remained in business.

Mark Wadsworth said...

AW, good points all.

What worries me about this "taxes come out of rent" argument (which must be partly or largelyl true) is that the Homeys will just say "Well what are you worried about then? You pass all the tax you pay onto your landlord, so all the taxes on income make you no worse off, and we long-suffering landowners are bearing it all."