Inflation

[vand]

Inflation is so difficult because a convincing argument can be made either way.

You can look at falling commodity and input prices and be convinced that these will feed through to flatter prices going forward..

or, you can look at the catch-up in wage growth that people will be pushing for over the next few years, and the lack of restraint in government budgets and be convinced that these will continue to keep inflation persistently high

[1nvest]

ONS 2022 to end of November 2022 (December value not yet released) has RPI at 17.5%

So likely that rate of change will slow.

Government practice seems to have transitioned to slowing inflation by manipulation of the inflation figures so that wages, pensions/benefits increases etc. are slower than they might otherwise have been.

I read today that 10% of pensioners are now higher rate taxpayers, and with freezing of allowances more pensioners will be drawn into also being taxpayers.

[OhNoNotimAgain]

Anyway, inflation is falling in America (which is where I and several others on TLF primarily invest nowadays). Goldman Sachs recently put out a forecast for American inflation falling to 2.9% by December 2023 (compared to 7.7% in November 2022). The consensus for UK inflation at the end of 2023 is around 6%. Now whilst economic forecasting has a deservedly bad reputation, IMHO inflation forecasting tends to be more reliable than say GDP forecasts.

.

They simply expect reversion to the mean.

[OhNoNotimAgain]

I find Richard Murphy an intriguing economist, one who is definitely unorthodox.

Here he argues that inflation will fall irrespective of what the government does, and so increasing interest rates is unnecessary, as are austerity fiscal policies. We will even be seeing deflation by 2024-25, so says the OBR. All these policies will do is deepen the recession and prolong the period before recovery.

https://www.taxresearch.org.uk/Blog/202 ... or-action/.

He may well be right, but would the orthodox markets buy into a reversal of policy?

FD

I think he is wrong because, apart from Covid, Ukraine and the inevitable delayed effects of the currency devaluation caused by QE, there is a long term fundamental demographic change under way. Working people are becoming rarer and that is increasing the price of labour. Since about 80% of most companies costs are labour that is going to impact prices.

This abrupt change has been smothered for the past two decades as the collapse of communism suddenly released a huge pool of labour from Eastern Europe and Asia. This huge addition of humanity to the global work force suddenly reduced labour costs so that it became cheaper to buy a new fridge from China than get Fred down the road to repair the old one.

That surge has now gone and every developed, and many developing, countries are facing a fertility crisis as female fertility rates fall below 2. The US is at 1.65 the BBC reported last night. China, Russia, Japan and all of Europe are all on a similar trend of dropping below 2.1, the rate needed to just maintain a population. Increasing female wealth is the best contraception known to women.

It is no coincidence that labour disputes have suddenly restarted in the UK amidst claims of overstretched services. There is no easy solution because the great retirement, of which this site is a clear demonstration, has removed half a million skilled productive workers from the UK economy. The problem is less acute in Europe because their pension and housing markets have not allowed so many well-off people to put their feet up. But the demographics are just as bad.

Fortunately, the US and the UK remain attractive to immigrants which will mitigate the problem to some small extent. But not enough to solve it.

[Nimrod103]

Working people are becoming rarer and that is increasing the price of labour.

Where is that in the data?
https://www.statista.com/statistics/281 ... ingdom-uk/

There is a shift down in employment figures due to Covid, and much blame has been heaped on lowered participation rates for the current inflation. But seen in the long term, the number of employed goes steadily upwards, and looks like it will be continuing.

My own view, FWIW, is that if you go around saying how wonderful and irreplaceable medical/railway staff/civil servants/fireman are, the more likely they are to get it into their heads that they deserve much more pay than other working people. So they go on strike.

[OhNoNotimAgain]

Working people are becoming rarer and that is increasing the price of labour.

Where is that in the data?
https://www.statista.com/statistics/281 ... ingdom-uk/

There is a shift down in employment figures due to Covid, and much blame has been heaped on lowered participation rates for the current inflation. But seen in the long term, the number of employed goes steadily upwards, and looks like it will be continuing.

My own view, FWIW, is that if you go around saying how wonderful and irreplaceable medical/railway staff/civil servants/fireman are, the more likely they are to get it into their heads that they deserve much more pay than other working people. So they go on strike.

But the population grew even faster. You are right though, I should have said "working people as percentage of the population"

[vand]

ONS 2022 to end of November 2022 (December value not yet released) has RPI at 17.5%

So likely that rate of change will slow.

Government practice seems to have transitioned to slowing inflation by manipulation of the inflation figures so that wages, pensions/benefits increases etc. are slower than they might otherwise have been.

I read today that 10% of pensioners are now higher rate taxpayers, and with freezing of allowances more pensioners will be drawn into also being taxpayers.

Newsflash: RPI was abandoned nearly 20 years ago. I suppose old habits die hard, though.

[stevensfo]

ONS 2022 to end of November 2022 (December value not yet released) has RPI at 17.5%

So likely that rate of change will slow.

Government practice seems to have transitioned to slowing inflation by manipulation of the inflation figures so that wages, pensions/benefits increases etc. are slower than they might otherwise have been.

I read today that 10% of pensioners are now higher rate taxpayers, and with freezing of allowances more pensioners will be drawn into also being taxpayers.

Newsflash: RPI was abandoned nearly 20 years ago. I suppose old habits die hard, though.

It is no longer considered an 'official' measure by the Gov ONS, but it is definitely still used. As far as I know, for student loans and train price increases at least. As well as most of us private investors who know how statistics can be manipulated.

So most definitely not abandoned.

In fact, still going strong!

Steve

[1nvest]

It is no longer considered an 'official' measure by the Gov ONS, but it is definitely still used. As far as I know, for student loans and train price increases at least.

So students with debt inflation of RPI + 3% and 41% taxation of above minimum wage (student tax, income tax, NI) will opt to do what? Black market I guess must have significant appeal. Drunks, junkies and crime rise in such times as these!

[Tedx]

The US Bureau of Labor Statistics reported on Thursday that inflation in the US, as measured by the Consumer Price Index (CPI), declined to 6.5% on a yearly basis in December from 7.1% in November. This reading came in line with the market expectation. On a monthly basis, the CPI declined by 0.1% following November's increase of 0.1%.

https://www.fxstreet.com/news/breaking- ... 2301121330

[Alaric]

ONS 2022 to end of November 2022 (December value not yet released) has RPI at 17.5%

Price increases are something you see if you regularly shop for the same staples in different supermarkets.

Take a pint of milk for example. For a long while it was always 49p, Then there was a price war and it went down to 45p. After that it went back to 50p. It was 95p last week, although some supermarkets follow Aldi pricing which can be a little lower.

Bizarrely some prices, sweetener at £ 5 a tub, are unchanged.

Also the 2 for £ 4 deals have now become 2 for £ 5 .

Is it not the case that the RPI is constructed using the same methods as Stock market indexes? That's taking a weighted basket and comparing its price over time. How would a stock market index behave if constructed like CPI?

[ursaminortaur]

ONS 2022 to end of November 2022 (December value not yet released) has RPI at 17.5%

Price increases are something you see if you regularly shop for the same staples in different supermarkets.

Take a pint of milk for example. For a long while it was always 49p, Then there was a price war and it went down to 45p. After that it went back to 50p. It was 95p last week, although some supermarkets follow Aldi pricing which can be a little lower.

Bizarrely some prices, sweetener at £ 5 a tub, are unchanged.

Also the 2 for £ 4 deals have now become 2 for £ 5 .

Is it not the case that the RPI is constructed using the same methods as Stock market indexes? That's taking a weighted basket and comparing its price over time. How would a stock market index behave if constructed like CPI?

Both RPI and CPI use weighted baskets of goods. Although there are some differences in the goods chosen for the basket the main difference is that RPI uses the arithmetic mean in its calculation whilst CPI uses the geometric mean. Given the same increases in the same basket of goods the CPI calculation will produce a lower result than the RPI calculation (or exceptionally the same value if the difference for each item is exactly the same for all items in the basket). This follows from the mathematical proof

https://www.amsi.org.au/ESA_Senior_Years/SeniorTopic1/1d/1d_3links_6.html#:~:text=Exercise%2011%20gave%20a%20geometric,prove%20this%20algebraically%2C%20as%20follows.&text=a%2Bb2%E2%89%A5%E2%88%9A,called%20the%20AM%E2%80%93GM%20inequality.

Although RPI is still being used for some things it will effectively be replaced in 2030 when the calculation used will be aligned with that for CPIH.

https://www.lcp.uk.com/our-viewpoint/2020/11/rpi-will-be-aligned-to-cpih-from-2030-with-no-compensation-for-holders-of-index-linked-gilts/

On 25 November, heralding the conclusion to the long running debate around the use of the “flawed” Retail Prices Index (RPI), the Treasury and the UK Statistics Authority announced that from February 2030 the RPI will be calculated using the data and methods of the alternative CPIH – a variant of the Consumer Prices Index including owner-occupiers’ housing costs. There is to be no compensation for holders of index-linked gilts.

The CPIH gives a lower measure of inflation than the RPI – by around 1% per year on average since 2010. This will mean that RPI inflation is expected to be materially lower from 2030 than it would otherwise have been. Lower RPI inflation will impact many aspects of a DB pension scheme (whether liabilities are RPI or CPI linked), including benefits, funding, investments and company accounting figures.

[Alaric]

Although there are some differences in the goods chosen for the basket the main difference is that RPI uses the arithmetic mean in its calculation whilst CPI uses the geometric mean.

If you were measuring increases in personal household expenditure, you would use an arithmetic method, as you would if measuring the performance of an asset portfolio. As you say, the CPI gives a lower result. Why isn't it the fake?

[vand]

I have problems with CPI, but it is undoubtedly a better methodology than RPI.

But I suppose a lot of people still quote the Dow as the most immediate way of measuring of stock prices.

[tjh290633]

I have problems with CPI, but it is undoubtedly a better methodology than RPI.

But I suppose a lot of people still quote the Dow as the most immediate way of measuring of stock prices.

Do they? The impression that I have is that both the NASDAQ and the S&P500 get as least as much attention as the DOW.

I think that it depends on where your interests lie.

TJH

[vand]

I have problems with CPI, but it is undoubtedly a better methodology than RPI.

But I suppose a lot of people still quote the Dow as the most immediate way of measuring of stock prices.

Do they? The impression that I have is that both the NASDAQ and the S&P500 get as least as much attention as the DOW.

I think that it depends on where your interests lie.

TJH

Sure, Trump's twitter feed would update us daily on the Dow back when it was setting new highs every week. If you go onto CNBC's website and go to the US page it lists the DJIA as the first index.

Yes, most real investors use the S&P but in broad circles day people will still see the Dow as synonymous with the stock market.

[CliffEdge]

CPI is a cheat.

[dealtn]

Although there are some differences in the goods chosen for the basket the main difference is that RPI uses the arithmetic mean in its calculation whilst CPI uses the geometric mean.

If you were measuring increases in personal household expenditure, you would use an arithmetic method.

No you wouldn't.

What would you do if you didn't have enough income? What would you do if you needed to make substitutes as some items became too expensive?

[dealtn]

CPI is a cheat.

Go on then. Please explain why as a macroeconomic measure of inflation it is a "cheat".

[Alaric]

[? 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.