Tuesday , July 17 2018
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Unexpected inflation in the bagging area

Image: The little old camera shop

No politician wants to be associated with inflation.  The trouble is that no politician wants to be associated with budget reductions either.  So while a government might cut benefits and services aimed at people who do not vote (like young people) or people who do not support them (like disabled people) they inevitably balance these cuts with increases for groups of voters who do support them (like older people) and lobby groups who fund them (like banks and hedge funds).  The result is that while the government can claim to be “cutting the deficit,” public spending and public borrowing just keep on rising.

One result of several decades of this is that real inflation – the prices you and I pay for things like food, rent and energy – keeps eating into our living standards.  To pretend that this isn’t happening, government statisticians are obliged to construct fiendish ways to pretend that inflation is barely rising at all.  As we have seen, one sleight of hand involves deciding and weighting the items that go into the “basket of goods” which is used to arrive at an average price increase.  If things that are increasing dramatically – like energy bills or housing costs – are excluded, then the official inflation rate can be held down.  If, at the same time, cheap electronics manufactured in Asia are included, these can cancel out much larger prices in essential items like food.

Even this sleight of hand has not been enough to prevent embarrassingly high inflation.  So statisticians began to deploy a new conjuring trick.  Rather than simply calculate a like-for-like increase in the price of a good or service, the statisticians decided that new items are superior to old ones.  As such, we are purchasing more value than we did in the past.  For example, a modern small car fitted with power steering, air condition and a decent music system is much better than a 1920s Model T Ford.  Once the statisticians have deducted the hypothesised cost of the improvements, it turns out that the difference between a Model T Ford and a modern Ford Fiesta is just a few percent (it is actually several hundred percent – a Model T in 1925 cost $250; roughly $3,500 in today’s dollars; a 2017 Ford Fiesta started at $13,660).  And, of course, you cannot buy a modern car (or TV, computer or broadband package) without all of the modern upgrades

Notice, however, that the statisticians never deploy this means of fiddling the figures when the result would be higher inflation.  For example, if some of the price increase on a new car can be deducted because of the supposed benefits to the consumer, what happens when consumers lose out?  For example, when I shopped at a supermarket in the past, the checkout would be operated by a member of staff who could help out with any price problems, replacements, etc.  Moreover, members of staff used to be available to help out with packing.  Today, consumers are encouraged to use self-service checkouts where, in effect, the consumer is doing the work that used to be done for them.  Similarly, many years ago, furniture was already fully assembled when you bought it.  Today, most furniture comes in flat-packs, leaving the consumer to construct it (or pay someone on Task Rabbit to do it for them).  Years ago, motorists did not have to get out of their cars when they stopped for fuel.  A member of staff would fill the tank for them, would take the money and bring them change.  They might even wipe the windscreen and check the oil at the same time.  Today, not only do motorists have to operate the pumps themselves, but they are encouraged to pay by card at the pump.

These are examples where the statisticians, if they were being honest, would add amounts onto the price to account for the lower value today compared to goods and services in the past.  That is, if they treated these items in the same way as they treat televisions, cars, computers and broadband, the official inflation rate would be much higher than it is.

This may sound academic.  It is not.  Fixed incomes, wage settlements, tax rates, pensions, interest rates and access to services are all set according to an inflation rate that ought to reflect the actual price increases experienced by real consumers in the real world.  In the UK, for example, public sector workers have been given lower than inflation pay increases every year since 2010.  Disabled people have received benefit increases at just one percent.  Only pensions have increased at the same rate as official inflation.  But all of these groups – accounting for millions of people – have faced price increases far higher than the official rate suggests.  One consequence is the current massacre of Britain’s high street shops, as increasing numbers of people are obliged to switch spending to essentials like food, energy and transport; and away from the discretionary purchases that allow an economy to grow.

This, perhaps, explains why so many ordinary voters have “had enough of experts” of the kind that pee on your head and tell you that it is raining.  At the very least, cognitive dissonance resulting from the gulf between official statistics and lived experience has contributed to the current rejection of centrist politicians who hide behind the official figures in favour of those toward the extremes of both right and left.

As you made it to the end…

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