Critics attack CPI figures
Anyone living in the UK recently will be surprised to see that the CPI figures dropped marginally last month. Anyone filling up their car with petrol, of seeing their latest mortgage repayments or paying their energy bills will be shocked. So is the CPI now a true representation of the way we live, or a sham used by government statistics departments to fool us all into thinking that life’s better than it really is?
According to the Daily Telegraph, in the UK the real increase in costs for the middle class – which now make up the bulk of the population of the UK (55 percent) – is not 2.4 percent, but 10 percent.
The CPI is more sophisticated a measure than it was fifty years ago, but it may still not properly represent daily spending patterns. The other issue though is that each time the product mix is modified to reflect the change in lifestyles and spending habits of the population, there is a tendency for the press to ‘call foul’.
Prof Richard Scase of the University of Kent told The Sunday Telegraph: ‘On my calculations, if you go out for a meal once a month, if you have something done to your car or house once a year, if you’ve had two hikes in your gas prices, then inflation for you is running at about 10 per cent.’
The Government last week announced that the official rate of inflation, as measured by the CPI, fell to 2.4 per cent during July, down from 2.5 per cent the month before. Government officials at the Office for National Statistics use a ‘basket’ of 650 goods to compile the CPI. However, the index ignores many staples of middle-class living.
For instance, school fees, council tax, domestic help, and household insurance are excluded from the CPI. Critics also argue that energy bills, petrol, health insurance and mortgage payments, are under-represented.
Labour charges such as building cost, motor repairs in many areas are rising at a rate of six to eight times the CPI and yet these figures are also not represented in the CPI figures.
Douglas McWilliams, the chief executive of the Centre for Economics and Business Research, said ‘The CPI bears no relation to reality for the majority of people and it has gone beyond a joke, we don’t live an extravagant lifestyle at all. Were it not for our savings, we’d be facing a very difficult time.’
The problem with the CPI is that it has become a ‘gold standard’ figure for governments and of course bares not enough relationship to what is going on in the real world – yet the CPI is being used by governments to direct central banks. As such we may end up in a situation where business cycles are dictated by extraneous events and true economic rhythms are broken.
It was only a few days ago that we quoted the Reserve Bank of Australia for explaining one reason for increasing interest rates was the increase in the price of bananas – perhaps our obsession with the CPI is just that, Bananas!