Matt T

Familes hit by £1,300 rise in cost of living

This is exactly the sort of article which demonstrates the Telegraph's (and other papers of course) shift from being a newspaper to a viewspaper. It's an article designed only to be a political statement, and as such its not accurate and its incoherent.

The figures in the table are not particularly inaccurate (see here for a very comprehensive summary) - I think mortgage payments have risen faster than that, they perhaps are including rent (only up 3% year-on-year). Food, however hasn't risn that fast, it's up 6% year-on-year, not 11%. They've extrapolated from basic goods, which have risen (such as milk, bread, butter and eggs - - all of which are in double figures), ignoring the fact that much of that expenditure is on things that haven't risen so much (beef and lamb have fallen, for instance). Also according to the RPI electricity and gas bills are down year-on-year.

But that isn't the main problem with the table. That is that it ignores other items of expenditure - e.g. electrical goods and clothes, which are lower. That's why the RPI is up 4% year-on-year, not 9% as their table suggests.

There seems two lines of argument they could take:

1. The CPI/RPI is not representative of the 'cost of living'
2. The CPI/RPI is not representative of an important sub-group's cost of living

The first is partly true of the CPI, as it doesn't include mortgage payments. This accounts for about 0.9%, ie virtually all of the difference between the two measures. But it doesn't apply to the RPI (it does to RPI-X, which is at 3.1%). In fact the RPI is pretty broad-based, so it is hard to say that it doesn't reasonably accurately capture the 'cost of living'.

But of course it is a national average, it isn't representative of any one person's cost of living. Here though where it becomes incoherent. If it doesn't capture pensioner's or the poor's cost of living, as Ruth Lea claims because they buy more essential goods, then that whopping figure for mortgage payments shouldn't be there, which in fact is the most important component of the article's argument. Furthermore the Telegraph constantly tells us that for the 'middle classes' inflation is higher than the true rate. So it's higher for the elderly, the poor, and the middle classes. That can't be true.

No-one is arguing that prices of certain goods are rising quickly, and indeed that prices of all goods are rising faster than they have been. But one has to try to make the argument make sense. It then quotes Phill Hammond, the Shadow Treasury Secretary:

"These figures make a mockery of Gordon Brown's boast of low inflation.''Thanks to his economic incompetence, ordinary families are now faced with soaring food and fuel costs. With real take-home pay falling, they will be more squeezed than ever."

There are so many questions the journalist should have asked Phillip Hammond. Clearly he doesn't believe the RPI is a good measure of inflation - how would he change it? Will a Conservative government raise tax thresholds and benefits by a higher rate to compensate? Will a Conservative government intervene in the price of foods such as wheat to reduce them? And does he understand what 'real take home pay' means?

Anyway it's interesting to look at the table of prices since 1987 to see what goods have actually fallen in price - not in real terms - but in actual cash terms, ie the price tag is lower now than it was then. Audio-visual equipment has fallen in price by 87%, toys by 13%. Both seem about right. Two others which are quite interesting - clothes (which the Telegraph calls a 'luxury'), which is not that surprising as any trip to M&S will tell you, and perhaps more surprising, new cars (3% down, whilst maintaining them has risen by 200%). This does chime with my own memory - my mother bought a Vauxhall Cavalier in 1992 for £14k, which seems about the retail price today (for a far superior car - I think the RPI does adjust for quality differences but I'm not sure), with big discounts if you shop around.

Labels: Econnomics, New

posted by Matthew @ 2/12/2008 05:37:00 PM Comments: 0