Inflation

[Flanker8]

Can somebody please, in laymans terms, explain the two rates of inflation: I've heard that there is a 'false' rate of inflation of 1.5% which doesn't include such things as mortgate interest, and a 'true' rate of inflation of 3.3% based upon the Retail Price Index.

[tigga]

Hi, im really sorry i cant help  you there, but was just thinking you may have better luck posting same Q in money and finance ?

[Oneeyedvic]

Flanker, I will answer this one for you at the weekend if noone has done so before - sorry - got a few too many things to do before I can expalin it fully (and got to find my notes from an assignement last year)

[Flanker8]

Thanks oneeyedvic - will look forward to it.

[Westminster]

Governments and other authorities use different measures of inflation to suit their different purposes. I've never heard of a 'false' rate of inflation (and on the face of it, it would be an odd thing to proclaim). There's a 'headline' rate of inflation, and an 'underlying' rate. The theory is that mortgage rate increases do not add to inflation, since they take money (and demand) out of the economy, leaving you with less to spend on that basket of household goods. The rate which is emphasised by the government may not be unconnected with which measure is more favourable (or moving in a more favourable direction) or which will cause the smaller rise in inflation-linked benefits.

[Oneeyedvic]

Hey Flanker,

 

Sorry, can't find my notes, but here is a link that should be able to help

 

http://news.bbc.co.uk/1/hi/business/3323281.stm

 

Essentially, the CPI is a great way of saying - hey inflation is really low, and a great way of not having to give people a decent 'inflationary' salary increase at the end of the year, whereas in reality, inflation has increased becasue the biggest monthly payment that people have to make (their mortgage) has increased ridiculously high.

 

Labour spin - no of course not!

[Westminster]

Oddly enough, no measure of inflation really compares like with like because of the increasing quality of most goods over the years. Ten years ago you could buy a bog-standard car for about �5,000. A bog-standard car will now cost about �6,000. Not only is that less in real terms, but the quality of the car is probably much higher. So indices based on 'shopping baskets' tend to over-estimate inflation.