The truth behind inflation
Fraser Nelson 10:16amIs Brown right on inflation? TGF UKIP appeals for help: is it correct to say as he did in the Observer and on Marr that inflation is 4% in America, 3% in Eurozone and 2% in Britain? I was thinking of Fisking the interview – but soon worked out it would be longer than the transcript. And perhaps Brown’s statistics are not supposed to be taken literally, like John Prebble’s books or the EU’s accounts. But for those who care, here’s the story on inflation.
It jerks around a lot, and Brown is lucky to have Britain in a dip and America in an upswing last month. The figures he referred to were reported by various countries. But crucially, definitions vary. The best comparable version is produced by the OECD (excel, click here) in its consumer prices index. This gives the closest you’ll get to the truth.
First, let’s discard monthly fluctuations and look at the last 12 months (ie, 2007). The UK was on 2.3%, US 2.8% and Eurozone 2.1%. – so our inflation was not far behind Americas and worse than EU’s. For this year, the OECD predicts UK 2.2%, US 2.7% and EU 2.5%. The huge differences Brown points to don’t exist. But did anyone seriously think otherwise?
Presenting blips as trends is one of Brown’s conjuring tricks. The other is the “metric switch”– ie, comparing apples with pears. It’s a small point, but he also deployed this by telling Marr that inflation was over 10% in the early 1990s and 2% now. What he didn’t say the 10% figure was for RPI inflection (for three months in 1990) where his 2% figure is the new CPI index he uses. An honest comparison would have said RPI peaked at 10.9% and is 4.3% now.
Two final points. Iain Dale says that people’s experience is that of rather pernicious inflation – no matter what Brown says. This is because a) this year’s inflation is on the back of last year’s high inflation and b) Brown is using the deflated CPI which is now two points behind RPI (which almost all of us grew up calling inflation). The 4.3% RPI figure would square a lot better with people’s experience.
In the end all the number fiddling in the world won’t help because, as the FT puts it, “the UK continues to have the nastiest embedded inflation problem of any developed economy.” Read the rest in this Alphaville post.
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Comments
TGF UKIP
January 8th, 2008 11:57amFraser, thanks for the help and illumination. I suspect a number of other of Brown's claims on Sunday were equally specious but do you think there is the slightest chance of Cameron taking Marr to task. The Tories constantly, but with reason, whinge about the BBC's inbuilt Labour and Brown bias and Marr above all has form in allowing Brown free rein. (It was noticeable that while he mentioned the gold sale, he very carefully stayed away from giving the viewer, who wouldn't have had a clue what it was all about, the embarrassing details - sold hamfistedly by Gordon @ 249, $857 now.) Why don't the Tories put the BBC on the backfoot, after all what could they possibly lose?
Alex R
January 8th, 2008 1:39pmFraser, It is not a question of growing up with RPI - it is still widely used by government and quasi government bodies today. Student loans are just one such example with interest payments linked to RPI, not CPI. Another is the rail authorities – in justifying their recent price hikes of 4.8% they implicitly referred to RPI by suggesting that the rises were only just above inflation. There are also issues in how inflation is calculated. As Chris Giles, writing in the FT back on 26 July 2007, pointed out: “A survey in Legal Week recently found that law firms had increased their hourly rates by 6 to 10 per cent. That is inflation. But it will appear as increased output in the index of services, because data shortages force the ONS to adjust law firms' turnover for inflation using an index of the wages of estate agents, among others. In other words, pay a lawyer 10 per cent more and Britain's output and productivity rises. But pay a doctor 10 per cent more and it is inflation, because output in health services is measured by the amount doctors do.”* * Chris Giles, “Lies, damn lies and befuddlement”, FT, 26 July 2007
Fraser Nelson
January 8th, 2008 2:27pmTGF UKIP, how many people dya think read this post? Not many. How many comments dya think it's heading for? I'd say <10. Figure bore people, which is why it's tough for journalists to enter this terrain. Wrestle Brown over data and lose your half audience by the end of the sentence. Brown sees and exploits this loophole in the mass communication system. The Tories would too, if they had more wits. Alex R, you're right - when Brown switched to CPI he said he'd still use RPI for pay deals. But talking about CPI in public makes things sound far less bad than they are.
TGF UKIP
January 8th, 2008 5:16pmFraser, take your point. It also occurs to me, though, that it might also depend whether it's TV or radio for I have heard plenty of fencing over figures on "Today" for example. Mind you Brown with Naughtie is every bit as much free rein for Brown as it is with Marr. All part of the Labour jockocracy, I guess.
Fraser Nelson
January 8th, 2008 5:43pmYes, sometimes it flares up and becomes a "Brown misled the nation" shock. But mostly, folk let it go. Which is why Labour in 05 could campaign on the "Tory cuts" line which was 100% untrue. Nick Robinson heroically kicked up a fuss one day, but it was dropped in the rest of the campaign. But one medium where lies are picked on is the blogosphere. I like to think that Fisking means that politicians of all parties will know that if they lie, and the print/broadcast media don't pick them up, they will be pilloried online for it. And - who knows - all this may make the next election a slightly more honest one. Right, no more on this post or I'll break my own prediction about generating <10 comments.
billy
January 9th, 2008 12:02amI'm following what you say.
Don't necessarily understand it all but I'm interested. I retire this year on a small pension and am debt free. At the moment I still think that I can manage but I won't be running a car and I have taken every energy conscious improvement that I can with my home.
David Belchamber
January 10th, 2008 2:34pmFraser, don't give up with posts like this one. It is essential these days to confuse many more issues with facts and you have given me the chapter and verse I require on which to base my own arguments about (i) Gordon Brown's duplicity and (ii) how useless the CPI index is for proving anything worthwhile. The police are no doubt told to adhere to a pay rise below inflation (i.e. the CPI), while MPs no doubt prefer to use the RPI. "All men are equal but..."
melanie mclean
January 10th, 2008 4:01pmThat's an excellent point David. If CPI is such a fair measure of inflation for the country and for the BoE to base IR policy decisions on, let's have (Labour) MPs vote themselves a pay increase based on it. Excellent!