why is cost of housing excluded from inflation? CPI

[chrcoluk]

I see that RPI is in process of been retired.

I have tried to understand the reasons for using CPI instead of RPI but usually its just a vague "because its lower" or vague "its more accurate".

However considering that for people who rent their rent is their biggest bill, how can excluding rent from the inflating index be considered accurate, for reference rents rise on average 3-8% per year, well above CPI.

 

[Brizzles]

Thats life buddy.

 

[Monkeynut]

It's politically inconvenient to include it.

 

[Greebo]

RPI overstates inflation and is awful maths and CPI understates it. ONS does also do two other measures - RPIJ – which uses the basket of goods of the RPI, but maths more like CPI – the ‘J’ stands for Jevons, who is the bloke who worked out the geometric formulae it will use; and the CPIH – which is the CPI with housing prices added in.

Either of the other two would have been better.

Anyway I expect the main reason for the change is that it will save the UK Govt around £4bn a year. Boris has to find the money for all the things hes promised from somewhere...

 

[[FnG]magnolia]

I'm wanting some @Kemik or @Pudney accountancy views in here, STAT!

 

[chrcoluk]

Thanks Greebo thats an insightful answer, I will check out CPIH and RPIJ and offer my opinion on them both later. I am not sure what my opinion is on house prices been added I was more on about cost of housing such as a ongoing mortgage cost or rent. Those can often bear no relevance to house prices in themselves especially with rent.

 

[Greebo]

Thanks Greebo thats an insightful answer, I will check out CPIH and RPIJ and offer my opinion on them both later. I am not sure what my opinion is on house prices been added I was more on about cost of housing such as a ongoing mortgage cost or rent. Those can often bear no relevance to house prices in themselves especially with rent.

Sorry my fault for not making it clear, I should have said costs and not prices eg mortgage and rent costs. From memory it doesnt include the actual price of the house.

 

[Kemik]

According this this article, it was replaced for two reasons:

1. The RPI was officially introduced in 1956 and remained the official rate of inflation until it was replaced by the CPI in 2003, a measure which has existed since 1996 in response to an EU directive to standardise the way in which inflation was measured in the eurozone.

2. The Governor of the Bank of England, along with a lot of statistians don't like RPI. The reason is exactly what your posted, rent makes up a huge element of our spend but is primarily driven by a limited number of individuals. Therefore landlords have a huge impact on the index and it is therefore not representative of how pricing of most products we buy change. This makes the stat useless for general use. I can understand why you might want it for wage discussions though.

 

[Randomface74]

and neither include shrinkflation so are completely worthless

 

[Kemik]

and neither include shrinkflation so are completely worthless

Not strictly true. They take products and brands with set weights. If weights go down then they try to find the same product at the same weight as the historical item. If they have to change products then that would be considered in the overall weighting. Food accounts for around 10%, so not huge.

 

[LeMson]

Cos it would prolly be massive

 

[Deleted member 77746]

It's disgusting how much some houses cost. They just bricks and mortar at the end of the day.

 

[Jokester]

Given how a lot of businesses use inflation itself to justify there price increases, it's probably a good thing it's not included. There's also the fact that for a lot of people it doesn't matter or doesn't behave in a way all other products do - if I'm on a fixed price mortgage for example, interest rates change or variations of costs across regions.

 

[LuckyBenski]

It's disgusting how much some houses cost. They just bricks and mortar at the end of the day.

Plus the ground they're stood on...

 

[Jokester]

And the location, location, location there in.

 

[Dis86]

And the electrical systems, gas systems, water systems, fixtures and fittings. The work that has gone in to constructing them. Maintaining them.

But yes, the land and location are the biggies.

My current house has a value of £220k but a rebuild cost of only £130k.

 

[Scam]

It's politically inconvenient to include it.

This. Everybody wants ever inflating house prices because it looks good for the economy. If people realised this is bad for 99% of the population then...

 

[ahar]

I see that RPI is in process of been retired.

RPI has been in the process of being retired for years - despite the best efforts of the ONS, Bank of England etc it keeps staggering on, zombie like!

 

[bigmike20vt]

It's disgusting how much some houses cost. They just bricks and mortar at the end of the day.

most of the price of your house - if you live in an area with high prices of course - is actually the land your house sits on.

iirc my house in insured for around 70K **edit actually i just checked my policy as i changed recently... apparently my total buildings cover is £500k!!! which is double what my property is worth!!** for a bricks and mortar total rebuild..... but its actual cost is far more than that.... and if i lived 15 miles down the road in Cambridge with the garden i have, the percentage would be even less.

edit... should have read the whole thread. ninja'd multiple times

 

[Energize]

CPI is designed to produce as artificially a low inflation figure as possible so the government can say they are handling the economy well, no economist takes CPI seriously.