The Lemon Fool

Arborbridge wrote:

stevensfo wrote:RPI 4.8%

CPI 3.2%

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


Steve

You can see why HMG like CPI and ordinary folk prefer RPI. CPI is a good wheeze for the government to put its hand in your pocket (notwithstanding the "known defects" in RPI - where known defects probably = disadvantage to HMG)

Arb.

I have always trusted the RPI rather than the CPI. The CPI is said to be a better way of comparing inflation among countries because it uses items and services common to all countries, but is not so useful to those actually living in a country. e.g. In the UK, Council tax and railways are used in RPI but not CPI. Yet I think that most would agree that council tax especially is a significant part of a household's budget. RPI is used to decide those train fare increases, as well as student loans. Take a place like France or Italy where higher education and public transport is much cheaper and we start to see how complex the system is. In places like Italy and Malta, there is no council tax - at least on your primary residence.

So I reckon that CPI is useful for comparing differences in general inflation between parts of the world, but UK RPI gives a closer approximation to the real situation as felt by the population.

Steve

stevensfo wrote:

Arborbridge wrote:

stevensfo wrote:RPI 4.8%

CPI 3.2%

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


Steve

You can see why HMG like CPI and ordinary folk prefer RPI. CPI is a good wheeze for the government to put its hand in your pocket (notwithstanding the "known defects" in RPI - where known defects probably = disadvantage to HMG)

Arb.

I have always trusted the RPI rather than the CPI. The CPI is said to be a better way of comparing inflation among countries because it uses items and services common to all countries, but is not so useful to those actually living in a country. e.g. In the UK, Council tax and railways are used in RPI but not CPI. Yet I think that most would agree that council tax especially is a significant part of a household's budget. RPI is used to decide those train fare increases, as well as student loans. Take a place like France or Italy where higher education and public transport is much cheaper and we start to see how complex the system is. In places like Italy and Malta, there is no council tax - at least on your primary residence.

So I reckon that CPI is useful for comparing differences in general inflation between parts of the world, but UK RPI gives a closer approximation to the real situation as felt by the population.

Steve

It is not jut down to what is in the basket, but also the methodology.

RPI may be a better representative basket, at least to you, but others will argue differently.

The main difference however is the construction where RPI uses a "simpler" averaging. CPI (and others) uses geometrical averaging, and better takes into account substitutional effects (eg. If Beer tripled in price some would abstain, others might buy wine etc. Those that abstain now have income to spend elsewhere, those that still buy beer may change the amount, or not, and therefore different variances in the amount of non-beer expenditure cash to spend on alternatives).

tjh290633 wrote:

Alaric wrote:

pje16 wrote:and a pound in 1960 is worth not short of £200 today

I don't think that's right. My personal benchmark is that 1960s pre decimal prices can be compared to today's prices by replacing the price in shillings by the price in pounds. So typically you might pay two to three shillings for a pint of beer at the end of the decade and the 2010s price was two to three pounds (more now, outside of Wetherspoons or supermarkets). Thus a twenty times multiplier rather than two hundred.

I have a couple of benchmarks, the price of petrol and the price of beer. Back in 1956 before Suez, petrol was 4/= a gallon, now £1.34 per litre, over £6 a gallon, so a 30 times multiplier.

Beer was about 1/3d a pint then, £4.90 a typical price now. something like 80 times.

Board and lodging is different, 10/= (50p) a night for DB&B then, about £40 a night now (say Premier Inn) which again is 80 fold increase.

I didn't realise that petrol was relatively so cheap.

TJH

Ounce of gold buys more than 3 times as much petrol now compared to 1956 (212 gallons now versus 63 gallons in 1956). Or petrol is less than 30% now of its 1956 price.

1nvest wrote:

tjh290633 wrote:

Alaric wrote:
I don't think that's right. My personal benchmark is that 1960s pre decimal prices can be compared to today's prices by replacing the price in shillings by the price in pounds. So typically you might pay two to three shillings for a pint of beer at the end of the decade and the 2010s price was two to three pounds (more now, outside of Wetherspoons or supermarkets). Thus a twenty times multiplier rather than two hundred.

I have a couple of benchmarks, the price of petrol and the price of beer. Back in 1956 before Suez, petrol was 4/= a gallon, now £1.34 per litre, over £6 a gallon, so a 30 times multiplier.

Beer was about 1/3d a pint then, £4.90 a typical price now. something like 80 times.

Board and lodging is different, 10/= (50p) a night for DB&B then, about £40 a night now (say Premier Inn) which again is 80 fold increase.

I didn't realise that petrol was relatively so cheap.

TJH

Ounce of gold buys more than 3 times as much petrol now compared to 1956 (212 gallons now versus 63 gallons in 1956). Or petrol is less than 30% now of its 1956 price.

£1 (1960) equivalent to £19.45 today's prices.

https://www.inflationtool.com/british-p ... e?amount=1

dealtn wrote:It is not jut down to what is in the basket, but also the methodology.

RPI may be a better representative basket, at least to you, but others will argue differently.

The main difference however is the construction where RPI uses a "simpler" averaging. CPI (and others) uses geometrical averaging, and better takes into account substitutional effects (eg. If Beer tripled in price some would abstain, others might buy wine etc. Those that abstain now have income to spend elsewhere, those that still buy beer may change the amount, or not, and therefore different variances in the amount of non-beer expenditure cash to spend on alternatives).

I understand the CPI methodology might be (or is?) better, but there's little value in a valid method if it does not include many of the expenses which are critical to households. It becomes a clever irrelevancy, and one suspects emphasised because it is advantageous to certain parties with big influence, notably the Treasury.

I exagerate to make the point: a clever system - but rememebr - rubbish in, rubbish out
Arb.

Arborbridge wrote:

dealtn wrote:It is not jut down to what is in the basket, but also the methodology.

RPI may be a better representative basket, at least to you, but others will argue differently.

The main difference however is the construction where RPI uses a "simpler" averaging. CPI (and others) uses geometrical averaging, and better takes into account substitutional effects (eg. If Beer tripled in price some would abstain, others might buy wine etc. Those that abstain now have income to spend elsewhere, those that still buy beer may change the amount, or not, and therefore different variances in the amount of non-beer expenditure cash to spend on alternatives).

I understand the CPI methodology might be (or is?) better, but there's little value in a valid method if it does not include many of the expenses which are critical to households. It becomes a clever irrelevancy, and one suspects emphasised because it is advantageous to certain parties with big influence, notably the Treasury.

I exagerate to make the point: a clever system - but rememebr - rubbish in, rubbish out
Arb.

Agreed, so what are the major items you feel are critical to households that aren't in the CPI index but are in the RPI. The only real one is housing costs (including Council Tax) and that is why we have CPIH which is otherwise identical to CPI. The UK Statistics Authority reviewed and recommended CPIH become the official measure. Do you have a reason why not? It was quite a wide consultation. I left the industry before this particular review but took part in the previous two.

The reason why RPI is still published and widely used is contractual. It is extremely difficult to stop it, or indeed phase it out in practice.

dealtn wrote:Agreed, so what are the major items you feel are critical to households that aren't in the CPI index but are in the RPI. The only real one is housing costs (including Council Tax) and that is why we have CPIH which is otherwise identical to CPI. The UK Statistics Authority reviewed and recommended CPIH become the official measure. Do you have a reason why not? It was quite a wide consultation. I left the industry before this particular review but took part in the previous two.

The reason why RPI is still published and widely used is contractual. It is extremely difficult to stop it, or indeed phase it out in practice.

Yes, it's the housing costs which are a major part of a family budget. If CPIH solves this problem that's fine - though I don't think it has been widely adopted by government, has it? Anyhow, as regards my own "accounts" I've been comparing with RPI for years and one needs the history on a chart. I note that CPIH goes back "far enough" but was set at 100 in 2015. Do you know why that was? It makes it seems as though it was started in 2015 then retro calculated back to 1988.


Arb.

Arborbridge wrote:I note that CPIH goes back "far enough" but was set at 100 in 2015. Do you know why that was? It makes it seems as though it was started in 2015 then retro calculated back to 1988.

It's a regular habit of the ONS. However the rebasing of the CPI and CPIH seems a bit premature. The RPI was last rebased to 100 in January 1987, before that in January 1974, 1962, 1956, 1952 and 1947. Had it never been rebased it would now stand at 3,199.8.

The CPI began in May 2005, back calculated to 1983, and was rebased in July 2015. Presumably they view 10 years as long enough, although the lack of inflation makes that seem a bit soon to me.

TJH

Returning to the earlier points, I cannot see any benefit in holding sterling cash if inflation is a real threat. Obviously, on past evidence, holding the Swiss Franc has always been a good idea against sterling. I have a friend who was already well off but he also has a DB pension denominated in Swiss Francs. For someone retired and living in Scotland that cannot be bad.

I have sterling Index Linked N S & I bonds. They use CPI I think but again that provides me with some protection.

If you are able to look forward a few years, holding shares in an inflationary environment has proved good, because of course real assets usually do OK and the State Pension will probably rise by more than 2.5% in April 2022.

Dod

Certainly agree about holding the swiss franc. The other point to bear in mind is that if high inflation does take off in western countries there will be a 'flight to quality', IMO, and the Swiss Franc will probably appreciate by more than the difference in inflation between them and other countries.

tjh290633 wrote:
The CPI began in May 2005, back calculated to 1983, and was rebased in July 2015. Presumably they view 10 years as long enough, although the lack of inflation makes that seem a bit soon to me.

TJH

If someone on the HYPP board did that, we would all moan about hindsight or at least the unreliability of working backwards.

scrumpyjack wrote:Certainly agree about holding the swiss franc. The other point to bear in mind is that if high inflation does take off in western countries there will be a 'flight to quality', IMO, and the Swiss Franc will probably appreciate by more than the difference in inflation between them and other countries.

My Brother-i-L worked in Geneva, paid in Swiss Francs, but lived in France. An ideal scenario which made him really rather well-off!

mc2fool wrote:

pje16 wrote:Enforcing the reason not to save your spare cash (above your emergency fund)

Yup, if we all went out and spent any spare cash that'd definitely help the economy. Alternatively:

"Cash as inflation protection

The best protection against an inflation scare might well be to hold more cash.
- Serious inflation scares can cause losses on equities, gold and bonds. Cash protects us from these....

Subjectively. Much of CPI and RPI are understatements so that pensions etc. lag (cost less) over time. Suggested as being broad/average whereas Inflation is a personal matter. For many their inflation rate might be a combination of house prices, stock prices and consumer goods/services prices. Historically a equal combination of House, Stock and CPI price only changes have exceeded RPI or CPI alone and cash hasn't been a good inflation hedge.

Liability matching, such as if in ten years time you anticipate 'spending' your wealth at that time perhaps a third each on house, stock and consumer goods/services, then holding a third each in house, stocks, inflation bonds would more liability match that expectancy. What inflation bonds might lag due to negative real yields so stock dividends and imputed rent benefits might offset that 'cost'.

Short dated treasuries have been engineered so as to likely lag inflation and as such inflation bonds is perhaps the better choice.