Economic indicators, useful or meaningless?

padington

Thrugelmir wrote: »

Inflation has been a key policy of all Governments since WW2. Surprising that no one has ever complained before. Perhaps it's because that debt finally has become a problem that inflation no longer provides the answer to. As there's plenty of people willing to work for a lot less.

Maybe credit wouldn't have become a problem if inflation was calculated properly because we would then have kept to only a small rate of real inflation by rising interest rates much earlier.

As is stands we have rampant real inflation, and no real desire to control it properly ( as is evident in our laim systems of calculating inflation) partly because one of the symptoms of such a system of governance makes the rich richer.

Sadly it makes the asset poor, poorer, when when you consider their likelyhood of owning a roof over their head ( as opposed to the owning shiny pieces of metal or plastic which will break soon enough).

Generali

padington wrote: »

It doesn't measure the increase of the price of houses.

It does via the proxy of the cost of mortgage payments.

Even if you did include the full cost of house prices into the index, which would be nonsensical, it would be such a tiny proportion of the total index that it would have a negligible impact on the level of inflation in the UK.

As a thought experiment, think about the amount of money you spend on buying a new house each year compared to the amount you spend on potatoes. The weights in the RPI reflect the amount of money people spend on each thing.

antrobus

padington wrote: »

It doesn't measure the increase of the price of houses.

CPIH includes housing costs.

michaels

Generali wrote: »

It does via the proxy of the cost of mortgage payments.

Even if you did include the full cost of house prices into the index, which would be nonsensical, it would be such a tiny proportion of the total index that it would have a negligible impact on the level of inflation in the UK.

As a thought experiment, think about the amount of money you spend on buying a new house each year compared to the amount you spend on potatoes. The weights in the RPI reflect the amount of money people spend on each thing.

I spend 600 per month to rent half my house from the bank and give up the same amount of income on the rest of the capital compared to 400 or less per month on food.

antrobus

michaels wrote: »

I spend 600 per month to rent half my house from the bank and give up the same amount of income on the rest of the capital compared to 400 or less per month on food.

Oddly enough, that's how the ONS determine the level of owner occupiers’ housing costs for the purposes of the CPIH. They have a rental equivalence price index that assumes that the property owner is in receipt of a flow of services that is equivalent to the rent that the dwelling would generate in the rental market.

padington

antrobus wrote: »

CPIH includes housing costs.

http://blogs.new.spectator.co.uk/2015/05/why-cant-we-have-an-inflation-index-which-includes-house-prices/

Generali

padington wrote: »

http://blogs.new.spectator.co.uk/2015/05/why-cant-we-have-an-inflation-index-which-includes-house-prices/

The Government collects data on house price increases and the BoE will use that data as a part of its decision making process.

Put yourself onto the MPC a couple of years or so ago. Growth is below trend, inflation is in a temporary blip but only because of a one-off blip in commodities, unemployment is 2-2.5 million, growth is well below trend and threatening to slip back into recession, Greece is going bust, London house prices are going gangbusters. Are you really going to vote to increase interest rates to reign in house prices? I suggest that if the answer is "Yes", we know exactly why you aren't on the MPC.

michaels wrote: »

I spend 600 per month to rent half my house from the bank and give up the same amount of income on the rest of the capital compared to 400 or less per month on food.

And that figure is captured in the RPI.

Our Peruvian bear friend is wondering why house prices aren't included. You spent nothing, I would wager, on the actual purchase of a house this month.

antrobus

Generali wrote: »

...Our Peruvian bear friend is wondering why house prices aren't included. You spent nothing, I would wager, on the actual purchase of a house this month.

That's about it.:)

As the OECD says;

The consumer price index (CPI) measures changes over time in the general level of prices of goods and services that a reference population acquires, uses or pays for consumption.

A house is a capital good. It is not consumed in one period, but rather generates a flow of services that are consumed in each period. Thus it is the change in the value of that flow of services that matter for the purposes of measuring consumer price inflation, and not the change in the value of the capital good.

As I said before, you really need to understand the difference between capital and income.:)

wotsthat

I suppose if everyone purchased a house with cash then the RPI basket would be less reflective of what was happening in the real world. It would engage the statisticians for sure trying to weight them as people buy what? 3 to 7 houses in a lifetime on average?

padington

wotsthat wrote: »

I suppose if everyone purchased a house with cash then the RPI basket would be less reflective of what was happening in the real world. It would engage the statisticians for sure trying to weight them as people buy what? 3 to 7 houses in a lifetime on average?

If things keep up soon the majority of homes in London will be bought with cash, currently 40% if memory serves me correctly.

To be honest the average person doesn't care what some economist refers to as inflation regarding consumption or not. We all know life has been getting measurably expensive and therefore real inflation has gone through the roof. My key expenses are travel, beer, entertainment and housing costs ( workmen, utility bills, broadband etc, insurance) all of which has gone up considerably.