why is cost of housing excluded from inflation? CPI

[Vexr]

Talk on inflation using the US as an example:

https://www.paulcraigroberts.org/2017/03/02/can-truth-prevail-paul-craig-roberts/

A second way that government has contrived in order to undermeasure inflation is to declare price rises “quality improvements” and not count the higher price as inflation.

Using these methods, an 8% rate of inflation can, for example, be reduced to a 2% inflation rate.

The low inflation rate is what produces the appearance of real GDP growth. As GDP is measured in prevailing prices, in order to know whether the GDP number is the result of an increase in the output of goods and services or merely the result of higher prices or inflation, the nominal GDP figure is deflated by the inflation measure.

For example, if nominal GDP rises 5% this year over last year, and the inflation rate is measured at 2%, real GDP has grown by 3%. However, if the 2% inflation rate is the contrived result described above, and inflation is really 5% or 8%, GDP growth was zero or declined by 3%.

And so forth. Increasing personal debt no doubt has the effect of making the real inflation rate look like the fabricated inflation rate, until it all goes kaboom (again).

 

[Greebo]

Ah so not only are the Government saving £4bn per year but they will now be able to claim pay rises are going up more than inflation. Classy. Smoke and mirrors

 

[Eurofighter]

Scam

 

[d_brennen]

Plus the ground they're stood on...

And all the filthy immegents wot take
r homes, jaabs and womens.

I have a solution to the housing mess though. We take our country out of the EU, make the markets jumpy by putting a clown in charge and then crash the economy. Oh, wait, someone beat me to it

 

[muon]

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.

Where did you come up with this nugget.

CPI and CPIH exist because most economists said RPI was crap.

RPI is massively flawed and does not represent accurately the prices of things.

https://www.ft.com/content/9eef27a4-2866-11e8-b27e-cc62a39d57a0

1. What is wrong with the RPI?
Any inflation measure must translate prices collected in shops into an average price for an item. Statistical agencies usually use simple averaging techniques to calculate this, but uniquely in the UK some parts of the RPI use a different method, the Carli index.

This takes an average of price changes rather than an average of actual prices. It gives what the Office for National Statistics admits are “implausible” results, particularly for clothing prices.

Take a typical pair of women’s trousers: their price has risen just 1.6 per cent between 2010 and 2018, according to the ONS. Although no index is perfect, the Consumer Price Index’s formula to average the price of items comes closest, and shows a price rise of 1.4 per cent. But the RPI’s formula suggests the price more than doubled over the same period.

 

[muon]

The cost of housing is very difficult to incorporate into an inflation index as mortgage interest is so closely tied to the Bank of England base rate. What this means is that you get wild swings in RPI as the base rate changes.

The official measure of inflation is CPIH which does more intelligently incorporates housing costs (looks at rents rather than mortgage payments).

https://www.ons.gov.uk/economy/inflationandpriceindices

 

[Kemik]

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.

Evidence?

 

[The_Abyss]

The cost of housing is very difficult to incorporate into an inflation index as mortgage interest is so closely tied to the Bank of England base rate.

I don't think that it is safe to say that any longer. The BOE base rate has changed three times in the past 11 years - down 0.25% once and up 0.25% twice.

Look at what's happened to fixed rate and variable mortgage rates available over the same period. There's little relative discernible link.

 

[chrcoluk]

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.

Rent is 1 of many items true, but as a proportion of one's living costs its large.

So e.g. if you have bread at 1% inflation, milk at 0%, coffee at 2%, juice at 1%, and rent at 5%.
The cost of rent proportionally might be 98% of the 5 items, but only 20% of item count.
So that explanation for RPI is heavily flawed from the bank of england governor.

Is the inflation supposed to represent an average of cost increase over items (with items not weighted to reality), or is it supposed to try and represent the cost of living for a citizen? If its the latter CPI is totally unsuitable. I still havent looked at the other 2 systems posted by Greebo, so dont have yet an opinion on those. But will post it when I do.

Also I am curious as well what is indexed.

For me I would only index essentials paid out every month, I would typically exclude things like clothes, cars, electronic devices etc.

A bill you have to pay every month has far more impact than something you buy once every 2 years.

So maybe something like this.

50% rent/mortgage costs
20% petrol
20% food/drink excluding luxury items
10% gas/electric

Thats it, keep it simple and down to costs everyone pays every month. I expect the inflation from those 4 things would be rather different to what CPI spits out.

CPI seems like it was designed for people who want to deny the cost of living is going up as much as it is

 

[chrcoluk]

ok having read this I probably would be satisfied with CPIH.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4309498/

But I suspect there is goods put in the inflation basket that are designed to artificially keep inflation down that dont reflect day to day living costs.

What is your thoughts on CPIH Greebo?

 

[Mercenary Keyboard Warrior]

What you have to remember is the inflation figure by any mechanism is highly unlikely to match your own inflation.
It includes items that not everyone will even ever use, plus items that may be infrequent purchases.

Its useful as a guide but not a lot more to an individual.

 

[muon]

ok having read this I probably would be satisfied with CPIH.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4309498/

But I suspect there is goods put in the inflation basket that are designed to artificially keep inflation down that dont reflect day to day living costs.

What is your thoughts on CPIH Greebo?

Well good thing CPIH is the official measure of inflation.

 

[chrcoluk]

I thought CPI was?

 

[muon]

I thought CPI was?

CPIH. You'll see the ONS only really talk about CPIH every month.

https://www.ons.gov.uk/economy/inflationandpriceindices

They switched to CPIH as the official measure in 2017.

https://www.independent.co.uk/news/...tics-authority-economy-currency-a7869171.html

The Bank of England does use CPI, but they are not the official statistics body in the UK.

 

[A2Z]

RPI is used to calculate my yearly pay increase (thank you unions) so I always want it to be as high as possible in February!

 

[chrcoluk]

CPIH. You'll see the ONS only really talk about CPIH every month.

https://www.ons.gov.uk/economy/inflationandpriceindices

They switched to CPIH as the official measure in 2017.

https://www.independent.co.uk/news/...tics-authority-economy-currency-a7869171.html

The Bank of England does use CPI, but they are not the official statistics body in the UK.

They added it as a national statistic, there is nothing there saying the government and other bodies are using it for things like wages and benefits.

 

[muon]

They added it as a national statistic, there is nothing there saying the government and other bodies are using it for things like wages and benefits.

Official inflation measure doesn't mean they get used for benefits and wages. In fact those things all use a mixture of measures.

Student loans for example still uses the massively outdated RPI. Doesn't give any credence to the idea that RPI is the headline measure of inflation. That is CPIH.

On every ONS Inflation report (feel free to go backwards to 2017) the CPIH measure is the headline inflation rate.

https://www.ons.gov.uk/economy/inflationandpriceindices

edit:

The ONS explain this all here

We also undertook extensive user engagement as part of the transition to CPIH as our lead measure of inflation and have comprehensive arrangements in place for ongoing engagement.

https://www.ons.gov.uk/economy/infl...onsumerpriceinflationstatisticsjuly2018update

See Table 1 for a summary. CPIH is the official macroeconomic measure of inflation and more departments are moving to it over time.

Unfortunately RPI refuses to die for many real world uses. There is also legacy reporting based on CPI/RPI because there's no harm in providing those numbers in addition to CPIH (although RPI is no longer a "national" statistic).

 

[chrcoluk]

Ok I read this quote which is indicating what you said for the office of national staistics.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is a National Statistic and is our lead measure of inflation

That is good news, the press still keep referring to CPI instead of CPIH tho and trying to understand if thats a mistake on their part or if its because CPI is whats actually used by the government for their spending.

Trying to find out what is used for things like pensions, working age benefits, department budgets etc. I found a reference to the 2018 budget saying its planned for the "future".

Then I found this interesting page it was published during 2019 so is recent.

https://publications.parliament.uk/pa/ld201719/ldselect/ldeconaf/246/24606.htm

Check table 2 below #126

Mixture of RPI and CPI.

RPI seems to be used for things like tax increases, rail fares and student loans, to maximise revenue.
CPI seems to be used for things like benefits, and pensions.

There is one exception in each category tho, one revenue scheme using CPI and one expenditure scheme using RPI. No mention of CPIH in that table. The table doesnt indicate department spending measure of inflation used.

What are you thoughts on that article?