Alternative inflation report – how other countries are doing it better

Our last couple of reports have focussed on the unexpected wave of inflation that is being felt around the world despite us supposedly being involved in a global downturn, and how the UK is particularly feeling it.

This month we are focussing on how other major G7 countries measure inflation as it impacts upon different parts of their countries and social structure. Something we want to see done here in the UK and are currently pressing the Statistics Authority for.

The USA gives out the most comprehensive set of inflation figures every month. This month the CPI-U, representing the broad urban population is  1.1 % .  But it also gives a CPI-W figure for ‘urban wage earners and clerical workers’ which this month is  1.4  %. But they don’t just give a national figure for each of these populations. They also give a CPI-U figure and a CPI-W figure for most of their big cities and the US census regions.

This has made the USA very sensitive to emerging inflation and has prompted the USA to be one of the world’s lowest inflation economies.  A worker in Chicago and the Mid-West knows whether his prices are rising in line with the official figures for his area, in a way that someone working in Birmingham England cannot because we only get a couple of different national disembodied averages for our official figures. So if the figures are out of proportion with what workers are finding in the American cities the figures can be challenged in a way they cannot be in the UK.

Although the monthly figures can vary quite a bit across the US, in the longer run their system keeps them in line. On the basis of the index running since the early 1980s, price rises for Chicago have risen less than for the US as a whole.  But only by a couple of per cent over what is now a whole generation. (USA average currently at 218 and Chicago at 213)  Prices for the workers have risen less than for the broader population – 214 for the US and 206 for Chicago workers, despite the current monthly figure being higher.

France also has an index that is intended to represent the total population aswell as  one that represents what is called an urban household  headed by a worker. It is particularly used for adjusting the minimum wage.  For August inflation was 1.4 % on both indices. Until the 1960s France used to only calculate an inflation rate for Paris and say that that was the French inflation rate. But they continued to maintain a Paris index until about the time the Euro was launched.

The French have been able to keep inflation for these worker households in step with that of the overall population. Below you will see the figures showing how prices have shifted in the first years of the Euro before any of the dramas of recent years intrude into the story.  In the table below 100 = 1998.

The figures are very much in step, as were the US figures because a more sensitive approach to tackling inflation tends to  follow from such detailed indexing.

The Italian indices for registering inflation are today pretty much identical to the French system. In August the inflation rate for the broadest population was 1.6 %, as it was for workers’ families. Unfortunately the Italians no longer translate their full monthly release.  It can be deciphered with only a basic French/Italian at the link here.

Table 4. of the Italian monthly release gives inflation rates for most of Italy’s big cities. This is most probably because  inflation indices were first started by the big industrial cities like Milan, and led by Milan. It was Mussolini who brought in the national index, almost certainly because it would justify lower pay settlements for workers in the industrial cities than the local city inflation rate would justify.

So a basic local figure does since act as a double check on the system – as it does in the USA.  Milan is Birmingham’s twin city and inflation there is slightly less than the Italian national norm being currently registered as 1.4 %.

German inflation for September is 1.0 %. Germany now only does one figure for the broad population of Germany. But most of the large federal states produce a figure for their own local population since the 1960s.  The State of Hesse, which is home to Birmingham’s twin city of Frankfurt has an inflation rate which is slightly lower at 0.7 %. We also have a twin city in the former East Germany which is Leipzig in the state of Saxony. The Saxon inflation rate is currently higher at 1.1 %

However, Germans have lost trust in German price statistics since Germany went into the Euro in 1999. This is because the German government abandoned its more extensive range of monthly inflation indices. Former West Germany had produced price indices based on 4 household types across Germany. They were as follows

The old West Germany ran such sub-headings since the 1960s when the managerial household was added to complete this set. When the West  took over East Germany in 1990 they began to run a parallel set of sub-indices for there. By 1999 when these sub-indices were abolished along with the D-Mark, they were holding the inflation rates for all these households remarkably in step in both the former East and West Germany. Based on 1995 being 100, the family households in both East and West were at 105 on the index, and the ‘All household’ indices and the pensioner households were on 106.

Germany abandoned these baskets when they entered the Euro. They said this was because there were not enough 4 member families to justify it. But had they assembled a more contemporary basket for families they might have maintained  the confidence that there had been in the old system.

From what has been shown here of how other G7 countries register inflation, you will be able to appreciate the basis of what we are proposing to the Statistical Authorities should become our framework of inflation indices.

Our last monthly report can be found here.  This month the UK figures have not fallen like most of the G7 figures have, as can be seen in the list below. The UK remains the country with the highest rate in this group, and has long been in this position.

Andrew Lydon

Regional Prosperity & Inflation Project

This month’s comparable inflation figures are currently

United Kingdom                3.1 %

Canada                           1.8  %

France                           1.7  %

Italy                               1.6  %

USA                                1.1  %

Germany                         1.0 %

Japan                            -0.9 %

Alternative inflation report – or what Mervyn King does not mention

Our Retail Prices Index (RPI) stands at 4.8 % and the index the Bank of England targets – called the Consumer Price Index stands at 3.1 %. They are higher than the targeted indices of any of our G7 competitors.  Almost double the next one down the list.

France                 1.7  %

Germany            1.2 %

USA                      1.2

Italy                     1. 0 %

Canada                 1.0%     (June  figure)

Japan                 -0.7 %    ( June  figure)

This report was originally just intended to keep the fact that this country has usually got the highest inflation figure in the G7, despite us having inflation indices that understate inflation, in the minds of various people we are lobbying.  But we now use it to outline how our ideas about inflation are developing. As such we hope it is more interesting than the Bank of England’s quarterly Inflation Report, which concentrates on optimistic predictions that are almost always wrong in recent years.

We have consistently warned that food and energy prices are straining living standards across the world. Of course food is of far less weight than in the inflation baskets of the developed world than it was in the past , or than it is the developing world. It averages about 40% in some of the most populous Islamic countries, like Pakistan and Egypt for example, where social instability could have global consequences.

So although the fires and floods that are becoming a regular summer occurrence on the Europe-Asia landmass put pressure on our standard of living, it is many times more serious elsewhere.   

For example, Russia has again banned wheat exports which is already driving prices up outside that country. Stopping  farmers exporting is one of the world’s traditional ways of holding down prices in producer countries’ home markets.

Rather than inflation in the UK being the result of a series of one-off occurances as Mervyn King insists,  perhaps we are heading for a new world-wide era of Austerity. With inflation rather than deflation being the main global issue. What we have been promoting as our Regional Prosperity and Inflation Framework, might well have to serve as an ‘Austerity & Inflation’ Framework.

We have also recently published our outline of what an inflation index for our home region would actually tell us.

Using the most authoritative housing affordability figures for the regions – produced by the Halifax – we can see how housing prices, which should have weight in any proper inflation indices, demonstrate how a clear ‘Two Income Trap’ emerged under New Labour. It seems it now takes 2 incomes to buy a home that could be bought on one income when New Labour came to power. This fits with our long standing argument that two incomes are now required to run a household that could be run on one income a generation ago. But interestingly, the movement in house prices occurred as early as the Lawson boom of the late 1980s as far as the West Midlands is concerned. But real house prices fell back under John Major, before becoming the national phenomenon since. This is explained further on this project’s main webpage and it can also be accessed here.

This erosion in real wages did not help manufacturing jobs survive in the West Midlands, even in the later years of the Thatcher government. Had Nigel Lawson had an authoritative index for inflation in regions like ours, perhaps he would have heeded the warning it would have been sounding – and have restrained his inflationary boom before it became a national disaster. Labour would not then have slid down the same slipway. But that would have been a very different Britain, which might today have more manufacturing and less household debt than it has actually come to have.

We have recently set out a path for reform to the Statistics Authority’s review of inflation, and we are grateful to the Trust that has regularly supported us in this area of work  in recent years – The Andrew Wainwright Reform Trust.

Our report last month challenged the notion that we have been struggling with a global deflation in any way comparable to the 1930s and can be found here.

Andrew Lydon

LWM Regional Prosperity & Inflation Project

A trend set in – Alternative inflation report for June

Our Retail Prices Index (RPI) stands at 5 % and the index the Bank of England targets – called the Consumer Price Index stands at 3.2 %. They are higher than the targeted indices of any of our G7 competitors.

France                 1.5  %

Italy                     1. 3 %

Canada                1.4  %   ( May  figure)

USA                      1.1  %

Germany            0.9 %

Japan                 -0.9 %    ( May  figure)

It looks like a trend has now firmly set in for us to be the G7  inflationary economy. Besides undermining our living standards this will help overseas companies keep their grip on our home markets. In the post war decades, we could always rely on the Italians and often the French to have higher inflation than us.

Much has been said about how various world leaders have saved us from a repeat of the 1930s. But no repeat of the 1930s deflation has ever been on the cards in the last few years.  The price of food and energy had fallen after the First World War and had no tendency towards rising until the rearmament began in the late 1930s. This can be seen in the graph below of the UK cost of living index, the vast majority of which was food and energy purchases.

By contrast there has been an under-lying upwards push on food and energy prices through out most of the last couple of crisis years. Recently we have seen demonstrations against  the price increases across India and as drought grips important grain producing regions around Russia  the upwards pressure on food prices is set to continue.

Commentators have been talking about how close we have been to deflation. But  in the UK particularly, this is indicative of the poor standard of economics in this country. Briefings from the Bank of England in particular, often seem to suggest that  inflation does not just mean that prices are rising. They imply that inflation only becomes something when wage claims begin to be put forward on the assumption that prices will go on rising.

We have recently set out how we think inflation and especially house prices have undermined the standard of living in our West Midlands home region which you can go to by clicking here.

Last month’s edition of this report included an examination of how the UK lost track of its own people’s living standards in the 1980s,  and how conservatives are still politically blighted by it.  It can be accessed here

Andrew Lydon

LWM        Regional Prosperity & Inflation Project

Lessons from the Thatcher/Reagan years – an Alternative inflation report

The new coalition government have inherited the highest inflation rate in the G7. Higher even than China. And as they consider any sort of increase in VAT to pay off national debt they need to think about how they keep their finger on the national pulse as the country faces these challenges to their living standards.

Immediately on coming to power, Margaret Thatcher’s chancellor raised VAT, much against her initial reluctance. And this was the start of a process that lead to the popular perception that living standards had been badly hit under Margaret Thatcher. And for no lasting gain.

This chart shows the official story of living standards in the UK. We are supposed to be about twice as prosperous as we were in the 1970s.

The hard times under Thatcher and Major are merely slight setbacks that we quickly recovered from. But if people really bought that story, why did the Tories, even with the mess that Gordon Brown made of our economy, face such reluctance to allow them an overall majority in 2010? Birmingham and the West Midlands are a striking example of this reluctance.

Contrast this blight on the Tories to what happened in the US under Ronald Reagan whose heirs have never been blighted by Reaganism. Two George Bushes stand as evidence of this.

This chart shows that Reagan’s legacy was because living standards in the US were hit more under Nixon and Carter, and actually stabilised under Reagan. This chart and this outcome were in large part because they had good quality inflation and prosperity indicators.

When Reagan came to power, the US had long had monthly inflation figures for most big cities and even had regional indices. However, in the first years of Reagan they improved their inflation indices by revising the way housing was measured. This allowed them to apply counter-inflationary policies while having their finger on the pulse of the people’s economic life.

On behalf of LWM I am currently pressing the UK Statistics Authority to look at what can be learned from the system of US inflation indices.

History often seems to repeat itself, first time as tragedy, second time as farce. A government presiding over austerity that looses track of prices as they are felt across the country, would be a farce none of us would want to see. The coalition needs to allow the best inflation indices to be put in place and allow it the priority it deserves.

Andrew Lydon

Regional Prosperity & Inflation Project