CPI falls to 2.5%, RPI falls to 2.9%

Gracchus_Babeuf

The basket of goods and services used to measure inflation is certainly wrong. Too many luxury items like smartphones and laptops are included but food and transport costs, which are far more important to people, are insufficiently represented in the calculation.

Generali

Gracchus_Babeuf wrote: »

The basket of goods and services used to measure inflation is certainly wrong. Too many luxury items like smartphones and laptops are included but food and transport costs, which are far more important to people, are insufficiently represented in the calculation.

At the moment, the basket used by the ONS is made up of the actual spending patterns of, from memory, 20,000 people. The RPI and CPI is calculated using the way that real people spend their money in the real world.

You propose to use a system where we measure changes in prices in a way that doesn't reflect how people spend their money which is perfectly reasonable I guess but how would you decide what goes in or stays out? If luxuries are omitted, what's a luxury? Meat? Holidays? Consumer goods? Chocolate? Alcohol? Cigarettes? Who gets to decide what's in and what's out? You, me or the ONS?

Loughton_Monkey

Graham_Devon wrote: »

I've put my foot in my mouth enough times on this forum, so possibly doing it again won't matter.

BUT....agreeing with your point above, isn't the other issue that we spend more per year on the increasing items? (Engery, Petrol, Food etc) than we do on electricals and furniture? I honestly don't think I have bought any large electricals this year, just small electrical gizmo's for my son.

I know I certainly spend more on petrol than I do new sofa's. So while sofa's are decreasing in price, the thing that effects me personally is the increasing price of petrol.

Do the indices allow for this? Or is it just a basket with items (regardless of how we spend on them) providing the weightings? How many people buy new pieces of furniture, new clothes, new electricals each month? And how many buy energy, petrol and food each month?

If you look at the ONS website, you will find infinite detail that will 'prove' that the indices do allow for all of these.

Whether their actual detailed assumptions are 100% accurate may be in doubt, but their methodology is extremely sound.

It's a good job that it is because otherwise everyone might fall into the trap of looking at it just as you do. Along the lines of "I have to spend on..... and I never buy....."

Thankfully, they look at actual data of what the population buys. For an individual, things are bound to be different for two reasons. 1. No individual buys the "average" shopping basket in any one year/month. 2. No individual would buy exactly the same shopping basket this year as they did last year (adjusted only for the slow shift in trends already measured by ONS). Typically, we adjust our luxury spend according to our own personal circumstances.

When I retired 7 years ago, it broadly meant that my future financial health was 'set in concrete' inasmuch as my income is "fixed" by my savings/investment returns, annuity rates etc. My outgoings are "fixed" by what I choose to buy and how much things cost. I made assumptions on income. I made assumptions on inflation (3% actually). If my assumptions are correct, I can live to age 90 and maintain my same lifestyle.

Hence, for the whole 7 years, my own budget has been fixed at exactly 3% more than the previous year's budget. My own financial discipline means that it would be virtually impossible to exceed that. Even if inflation went up to 6%, say, I would simply adjust what I buy to fall within my budget.

This is made easier by the 'trick' of outperforming budget (spending less) and keeping the surplus as a sort of contingency fund. Exactly the same on Income.

A bit like the weather. RPI is the outside temperature. Nice to know. But personal financial discipline is setting your internal thermostat so that you are in control of your own climate.

Gracchus_Babeuf

Generali wrote: »

At the moment, the basket used by the ONS is made up of the actual spending patterns of, from memory, 20,000 people. The RPI and CPI is calculated using the way that real people spend their money in the real world.

You propose to use a system where we measure changes in prices in a way that doesn't reflect how people spend their money which is perfectly reasonable I guess but how would you decide what goes in or stays out? If luxuries are omitted, what's a luxury? Meat? Holidays? Consumer goods? Chocolate? Alcohol? Cigarettes? Who gets to decide what's in and what's out? You, me or the ONS?

OK, but how are those 20k people selected? What age, income and social class distribution is reflected in the 20k people? My feeling is that the 20k sample is skewed in some way - don't ask me to prove it because I can't but it's a gut feeling.

And there is an obvious difference between things which we cannot avoid paying for, eg. food, transport and household bills, and things we can live without, eg. an Iphone. It's the essentials that really matter.

robmatic

Gracchus_Babeuf wrote: »

The basket of goods and services used to measure inflation is certainly wrong. Too many luxury items like smartphones and laptops are included but food and transport costs, which are far more important to people, are insufficiently represented in the calculation.

Why not include 'luxury' items like smartphones? Everybody seems to have them so surely they are a valid part of expenditure? Your typical consumer will spend more on Apple than apples.

I'm not sure either that food and transport should dominate the calculation. I earn a statistically average salary and these items only take up a relatively small part of my budget.

Graham_Devon

HAMISH_MCTAVISH wrote: »

So we should set the RPI basket to measure only the consumption pattern of "skint people"?

Or do you think setting it to an average consumption pattern more representative of the average from all people (what we have now) might be a better and fairer way to do it....

Is it a consumption pattern, or consumption goods?

I'd suggest patterns are different to goods.

For example, does it allow for petrol to be bought 24 times a year, whereas a laptop once every 4 years? You can't mimmick spending completely, and the index will never match spending, but there are certainly things in the index that people buy say once (if that) a year which are showing downwards inflation, but things which people buy 2,3,4x a month which are increasing in value.

The measure appears to me, to look at the weight of the deflation on the laptop, against the inflaton on petrol, and if the laptop deflation weighs more than the inflation in petrol, you will show deflation (as the laptop has declined in price more as a percentage than the petrol has increased). Whereas in realty, what's happening is inflation on the goods actually bought routinely.

I don't know, which is why I'm asking.

Eellogofusciouhipoppokunu

Graham_Devon wrote: »

Is it a consumption pattern, or consumption goods?

I'd suggest patterns are different to goods.

A consumption pattern is merely the basket of goods that a person regularly buys.

DervProf

Graham_Devon wrote: »

I don't know, which is why I'm asking.

It is a good question.

All I can say is that probably like many others, it doesn't feel like inflation hit ~ 5% a year or so ago, and has now dropped to ~2.5%. I buy food regularly, but laptops less often (about 6 years ago, actually - and have just installed an SSD in it to make it perform better than a brand new one ). It feels more like inflation has been ~7% for the past 5 years. My energy and food bills have certainly risen a lot (although these have been tempered by "shopping around" more, and reduced consumption). No mortgage to speak of or rent (a mortgage may have helped reduced the rate, but rent less so). Inflation in the products that I purchase in the course of my everyday business has been fairly high, but to be fair has been around, or just above the official figures.

Loughton_Monkey

Eellogofusciouhipoppokunu wrote: »

A consumption pattern is merely the basket of goods that a person regularly buys.

No it isn't. A consumption pattern is what the population buys "on average". No person 'regularly buys' it.

Same as a statement that UK couples have 2.4 kids. Not a single person has 2.4 kids. But 10,000 couples are likely to have 240 kids between them.

I have no kids. So you must have 4.8!?

Generali

Gracchus_Babeuf wrote: »

OK, but how are those 20k people selected? What age, income and social class distribution is reflected in the 20k people? My feeling is that the 20k sample is skewed in some way - don't ask me to prove it because I can't but it's a gut feeling.

And there is an obvious difference between things which we cannot avoid paying for, eg. food, transport and household bills, and things we can live without, eg. an Iphone. It's the essentials that really matter.

The 20,000 are selected to try to be representative of the country as a whole.

The problem is when you try to separate out 'essentials', different people have different ideas about what is essential. Addictive things like cigarettes and alcohol are obvious examples but then there are substitutable items: I see public transport and cycling as substitutable for example but don't see margarine as an acceptable substitute for butter.

If you stray from what people actually spend their money on then you have to make decisions like that to which there is really no right answer.