Inflation

[vand]

[? What would you do if you needed to make substitutes as some items became too expensive?

Your income would be insufficent. Why disguise that fact as a measurement with cheaper substitutions?

You wouldn't credibly record portfolio losses with a geometric method.

Er, yes you do.

In investment management circles geometric methodology is overwhelming used to measure and compare managers' performances, including negative returns.

In terms of measures of inflation, substitution effect is very real, but equally it is difficult to capture the effect of this cardinally. Two things can be equally true.

[dealtn]

[? What would you do if you needed to make substitutes as some items became too expensive?

Your income would be insufficent. Why disguise that fact as a measurement with cheaper substitutions?

Because you are measuring a macroeconomic phenomenon which is what inflation is, which takes into account macro supply and demand changes as a result of factors outside of the microeconomic individual.

If you want to measure how your own individual circumstances change you can, of course, do that too. But even then it's not easy. How do you account for unspent income. How do you differentiate for items that are bought infrequently.? How do you adjust, if you don't allow cheaper substitutes, if you used to be able to afford 5 items but now only purchase 4 as prices have risen?

Macroeconomic inflation is a complex thing. Measuring it through strict arithmetic baskets of fixed quantities without income and substitution effects might give you a number - and a series - but that isn't inflation.

There is plenty of accessible literature on why that is the case.

[CliffEdge]

[? What would you do if you needed to make substitutes as some items became too expensive?

Your income would be insufficent. Why disguise that fact as a measurement with cheaper substitutions?

You wouldn't credibly record portfolio losses with a geometric method.

Cheat. What he says above.
Gp 4/5 * 5/4 = 1
Ap (4/5 + 5/4)/2 doesn't

[Alaric]

Gp 4/5 * 5/4 = 1
Ap (4/5 + 5/4)/2 doesn't

You would construct an arithmetical index from

begin period 4+5 = 9
end period 5+4 = 9

so no overall change. You need to take the root anyway on the GP and divide the end result by the first result on the AP.

So compare 5 moving to 5.5 and 5 moving to 6.

GP is ((5.5*6) /( 5*5))^.5 = 1.149
AP is (5.5+6)/(5+5) = 1.15

If inflation isn't the right word to describe price increases, we need a new one. Either that or it keeps it's everyday meaning and economists find a new word to describe whatever it is they are seeing when the CPI measure shows an increase.

[CliffEdge]

Gp 4/5 * 5/4 = 1
Ap (4/5 + 5/4)/2 doesn't

You would construct an arithmetical index from

begin period 4+5 = 9
end period 5+4 = 9

so no overall change. You need to take the root anyway on the GP and divide the end result by the first result on the AP.

So compare 5 moving to 5.5 and 5 moving to 6.

GP is ((5.5*6) /( 5*5))^.5 = 1.149
AP is (5.5+6)/(5+5) = 1.15

If inflation isn't the right word to describe price increases, we need a new one. Either that or it keeps it's everyday meaning and economists find a new word to describe whatever it is they are seeing when the CPI measure shows an increase.

To start with you spend £2
To end with you spend £2.05
So your money doesn't go as far
CPI is a cheat

[dealtn]

If inflation isn't the right word to describe price increases, we need a new one. Either that or it keeps it's everyday meaning and economists find a new word to describe whatever it is they are seeing when the CPI measure shows an increase.

Go for it. How about "price increases"? Inflation has a meaning in this context and macroeconomics got there first. Shame many don't understand what it is.

[NotSure]

If inflation isn't the right word to describe price increases, we need a new one. Either that or it keeps it's everyday meaning and economists find a new word to describe whatever it is they are seeing when the CPI measure shows an increase.

Go for it. How about "price increases"? Inflation has a meaning in this context and macroeconomics got there first. Shame many don't understand what it is.

I think balloons got there first

You are of course correct in that if RPI is 14% and CPI is 10%, then prices have risen by 14% but inflation is 10%.

However, outside of macroeconomic circles, inflation has come to mean both 'true' inflation and also price increases, but mainly the latter. e.g. dictionary definition here (Oxford Languages):

ECONOMICS
a general increase in prices and fall in the purchasing value of money.
"policies aimed at controlling inflation"

Hence why there is a lot of confusion, even anger. I like your idea of using the term "price increases" when specifically referring to price increases.

[ursaminortaur]

If inflation isn't the right word to describe price increases, we need a new one. Either that or it keeps it's everyday meaning and economists find a new word to describe whatever it is they are seeing when the CPI measure shows an increase.

Go for it. How about "price increases"? Inflation has a meaning in this context and macroeconomics got there first. Shame many don't understand what it is.

I think balloons got there first

You are of course correct in that if RPI is 14% and CPI is 10%, then prices have risen by 14% but inflation is 10%.

However, outside of macroeconomic circles, inflation has come to mean both 'true' inflation and also price increases, but mainly the latter. e.g. dictionary definition here (Oxford Languages):

ECONOMICS
a general increase in prices and fall in the purchasing value of money.
"policies aimed at controlling inflation"

Hence why there is a lot of confusion, even anger. I like your idea of using the term "price increases" when specifically referring to price increases.

Although the British government claim that CPI handles substitutions I've yet to see any explanation as to how it is supposed to be handling them. And certainly for the US version of CPI substitutions are actually acknowledged to be a problem

https://www.investopedia.com/ask/answers/012915/what-are-some-limitations-consumer-price-index-cpi.asp

One problem with the CPI that's been identified by economists, and which the Bureau of Labor Statistics freely admits, is that the index does not factor in the effects of substitution.

[Tedx]

It's a bit chilly outside, but UK & European (now a 16 month low) gas prices continue to fall steeply on ample supplies.

https://tradingeconomics.com/commodity/eu-natural-gas

Vlad will be......apoplectic.

[1nvest]

More than four-fifths of the UK-based economists surveyed expected Britain to lag behind its peers in 2023, saying the country was “suffering from ministers’ outright incompetence.”

Well it's a bit mad, isn't it. Elected because of, what... charisma, oral competence, the right rosette?
If one were appointing people to run a company the size of most govt departments, the process hopefully would be more rigorous. Someone on't wireless described the NHS as the largest single enterprise in the world.
Perhaps it would be better if the Lords ran the country and the Commons could just make recommendations.

Fortunate that so many of the investable companies in the FTSE have decent overseas earnings.

V8

IIRC the FTSE100 earning are over 70% from foreign, even the FTSE250 now has >50% of earnings from foreign. Both government and NHS management are so wasteful/poor to be unsustainable. Whilst some things may be done to try and fix the NHS, when it comes to parliament well there're never going to vote for change and as such without unrest we're stuck. The Sky reporting of how much has been 'gifted/donated' to individual MP's is just one indicator of the amount of endemic bribery/corruption evident within the UK political system.

[Itsallaguess]

‎ ‎
Inflation eases to 10.5pc in December -

Inflation eased to 10.5pc in December but remains at a 40-year high and far above the Bank of England's target of 2pc. 

A decline in petrol prices at the pump and the falling cost of clothing were the main reasons behind the slowdown in price rises.

The soaring cost of dairy products, pasta and energy boosted inflation to a 41-year high of 11.1pc in October despite government help to reduce bills. 

The consumer prices index stood at 10.7pc in November, according to the Office for National Statistics, which publishes the data.

The annual RPI inflation rate was 13.4pc in December.

Today's figure is the second straight month the consumer prices index measure of inflation has declined since then, in a tentative sign that inflation may have peaked sooner than expected. 

https://www.telegraph.co.uk/business/2023/01/18/ftse-100-markets-live-news-strikes-gas-inflation-cpi/

Cheers,

Itsallaguess

[Tedx]

It's going to fall off a cliff in the coming months.

Prices will still be 10% higher of course, but the rate of inflation will slow dramatically.

[1nvest]

It's going to fall off a cliff in the coming months.

Prices will still be 10% higher of course, but the rate of inflation will slow dramatically.

End of April 2022 saw a 3.43% change in RPI for the month, a 50% annualised rate.
End of April 2023 will likely see the dividend having slowed, the divisor having substantially increased and a dramatic slowdown in the year on year RPI inflation rate. Somewhat similar for CPI, but slower/lower as that is less volatile than RPI. CPI April 2022 saw a 2.5% monthly increase (34% annualised rate).

Recent CPI index 127.2 vs 115.1 a year ago. April 2022 index 120. Such that if CPI remains flat at 127.2 the increase in divisor from 115.1 to 120 = 10.5% to 6%. Possible that the dividend could even slow, cheaper energy maybe, decline from 127.2 to 125 in April 2023 would have CPI down to 4.2%. Which in turn would likely kill off any strikes and slow wage increases. Rail unions having turned down 8% to prolong strikes to closer to April may come to regret not having accepted the 8% offer.

[Tedx]

I just look at the price of natural gas as a proxy for inflation. Its plummeted since last year.

It's been chilly this week, but forecast to warm up this weekend and next week. The days are lengthening and will soon begin to get a little warmer.

Vlad knew that this had to be the winter that he throttled us, but he failed (although we've had a huge slice of good luck with the weather)

Meanwhile, giant offshore wind turbines are being installed at an incredible rate and our gas storage facilities are being expanded (reopened). I also think energy prices will stay just high enough to make people think about what they're using. I hope so anyway.

He'll not catch us out again.....of course, I cant allow for the incompetence of government and their ability to knacker things up....So, we'll probably be in darkness next January!

[servodude]

I just look at the price of natural gas as a proxy for inflation. Its plummeted since last year.

It's been chilly this week, but forecast to warm up this weekend and next week. The days are lengthening and will soon begin to get a little warmer.

Vlad knew that this had to be the winter that he throttled us, but he failed (although we've had a huge slice of good luck with the weather)

Meanwhile, giant offshore wind turbines are being installed at an incredible rate and our gas storage facilities are being expanded (reopened). I also think energy prices will stay just high enough to make people think about what they're using. I hope so anyway.

He'll not catch us out again.....of course, I cant allow for the incompetence of government and their ability to knacker things up....So, we'll probably be in darkness next January!

Phew! I was worried they would go running cap in hand to the Sauds - hopefully that's been dodged too

[Wuffle]

April is when benefits, pensions and minimum wage go up by 10.1%.
I think, after a quick Google.
I suspect that will be the reference and will have a prolonging effect.
If I don't maintain the delta with any of the above, I won't be very happy.

W.

[1nvest]

April is when benefits, pensions and minimum wage go up by 10.1%.
I think, after a quick Google.
I suspect that will be the reference and will have a prolonging effect.
If I don't maintain the delta with any of the above, I won't be very happy.

W.

I wouldn't be surprised if the March 2023 Budget saw a change from using CPI from 6 months earlier (end of September 10.1% rate) as the base for pensions/benefit increases, to one "more aligned with the current rate" ... perhaps 6.75% (March 2022 CPI index 117.1, Dec 2022 CPI 127.2 index - having dropped to 125 at the end of March 2023).

If NHS, out of work, housing, tax credits, disability benefits/spending are also restricted to the same figure or less than that 6.75% that would further slow/calm inflation and save north of £10Bn. In effect average/smooth benefits increases out to over multi-years rather than large increases one year, low increases the next due to volatility spikes.

[Alaric]

I wouldn't be surprised if the March 2023 Budget saw a change from using CPI from 6 months earlier (end of September 10.1% rate) as the base for pensions/benefit increases, to one "more aligned with the current rate" ... perhaps 6.75% (March 2022 CPI index 117.1, Dec 2022 CPI 127.2 index - having dropped to 125 at the end of March 2023)..

It might be possible to do that prospectively, but retrospectively would that not fail to revalue for six months' worth of price increases? There's an expectation that the change in CPI measured on an annual basis will fall, but is there an expectation that the CPI Index will fall, meaning that prices are measured to have reduced? Perhaps some price increases, notably on energy will be reversed, but will that be enough to affect every price? I'll believe that when I see a pint of milk at 60p or less, most recently it's been 95p.

[scrumpyjack]

Note there is in effect a double compensation for energy price inflation in that cash amounts are being handed out to help pay for it but the rise in energy costs will also be included in the inflation calculation of CPI.

It might have been better for all government support to have gone into restraining energy prices (as the French did, I think) and then to have had lower CPI inflation with a massive saving in benefits and index linked gilts. That IMO would outweigh the problem of helping everyone rather than only the most needy.

[Tedx]

Pretty sure I read somewhere that the hand outs were not going to reduce CPI ((an OBR decision if I recall correctly).

It was all to do with the way they were being treated/accounted for.

But I could be wrong.