Wednesday 28 September 2022

RPI/CPI. Just what do they measure?

These indices affect me on a day to day basis as we struggle to preserve our investors wealth.  But what actually do they measure?  

Well, it's not 'inflation'.  Inflation (sort of pre Keynes) was a word for the arbitrary expansion of money and credit hence an unwarranted increase in the money supply which in turn lead to higher ticket prices in that particular money of the prices of goods and services.

What other things increase prices - permanently.

How about government mandated 'useless ingredients'?  Things like car speed limiters and ABS systems.  These add costs to cars for things that you may not choose yourself.  The reduction in sizes of the Yorkie bar for the same price as government intervenes on sugar content. etc.

And on that subject what about taxes?  VAT increases prices.  PAYE is a de facto payroll tax increasing the costs of employing someone.  

Or subsidy policy.  Housing Benefit passes straight through the tenants hands into the hands of landlords at least helping to maintain rents and in some locations increasing rents.

Or foreign policy and the actions of others. Clearly the Putin /Ukraine thing is a government failure (from the perspective of everyone except Putin / Ukraine). War is diplomatic failure.  This contretemps has led to a spike in oil and gas prices which will self-correct as substitutes are found or consumers alter their behaviour to consume less.

Hence we do not seem to have a single word that covers all these factors that increase prices. Inflation is not that word. 

As regards market driven price increases these are mostly transient or seasonal.  Competition keeps prices low - witness supermarkets advertising specifically comparing prices. Markets generally, and Adam Smith style capitalism is all about doing more for less every day. The constant search for greater efficiency 

Perhaps then the RPI/CPI are more accurately thought of as indexes of government and bureaucratic failure?  

5 comments:

L fairfax said...

"Housing Benefit passes straight through the tenants hands into the hands of landlords at least helping to maintain rents and in some locations increasing rents."
Surely if a tenant has no income then without housing benefit they would be dependant on charity and would possibly not have such a nice home?
(I know for working tenants it is different but some recipients don't work).

Lola said...

LF. Precisely my point. Without that subsidised tenant the landowner may have had to cut his rent to attract a tenant.
And as charity is voluntarily funded (or at least it was) the charity will be far more careful as to how it spends its income than a gov't department.

rhoda klapp said...

"Hence we do not seem to have a single word that covers all these factors that increase prices. Inflation is not that word. "

Bloat?

Mark Wadsworth said...

Inflation is a widely used and abused term for lots of similar-ish things. I avoid the topic. Too vague.

"This contretemps has led to a spike in oil and gas prices which will self-correct as substitutes are found or consumers alter their behaviour to consume less."

Yup, the markets will sort this out. Often happens quicker than you'd expect :-)

In the instant case, there is GAS PRICE inflation. That just means that GAS is now more expensive relative to everything else. No point in pretending otherwise. Somebody somewhere is going to have to tighten their belts and cut back on "other stuff", me included.

This would have happened with or without the inflation that started about a year ago and for which the most likely explanation is QE madness.

Bayard said...

"Perhaps then the RPI/CPI are more accurately thought of as indexes of government and bureaucratic failure?"

It's just another myth that has been instilled in us, that inflation is inevitable, necessary and good. Inflation is a stealth tax on savers that is paid to borrowers, the biggest borrower of all being the government.