Tuesday, January 08, 2008

When is 2% really 4.5% ?

Ask the Treasury or the Government what the current rate of inflation is and they will answer that it is about 2%, and falling.

But retail prices - the cost of real goods in the shops - is up by 4.3% since this time last year; a statistic that is rising- it was 3.8% in October.

Factory gate prices, the measure of wholesale costs is up by 4.5% on a year ago; and also has been rising; from 4.2% in the Autumn.

Factory raw material prices have been shooting up by over 10%, and fuel and heating bills have risen by a similar amount. Council tax, rail fares and most insurances have gone up by 5% or more, and petrol is up by nearly 20% on this time last year.

And probably the biggest direct cost for most households - interest charges, have risen massively. The monthly amount paid by most people on their mortgage is up by at least 10% and their credit card rates by much more, after a series of base rite rises and the now infamous credit crunch which has raised the real cost of borrowing to ten year highs.

So how come the 'official' rate is 2%? Simple, the rate is based on comparing a hypothetical shopping basket with a similar basket a year ago; so only the prices of certain products and services are included.

But increasingly the index has been, er, how shall we say, manipulated somewhat. Housing costs are now left out, so the increasing price of homes and the rising cost of the money used to buy them is excluded; and the index is adjusted and weighted by statisticians to exclude the profile of pensioner households and those earning over about £50,000 annually.

In reality inflation is over 4% and everyone -including the foreign exchange markets - know it; which is why current year wage rises top 4% as well.

Remember the advice: if inflation looks like 4.5%, if it feels like 4.5% then it probably is 4.5%; and at 4.5% we are at the highest rates for eighteen years and one of the highest inflation economies in the West.

And the really bad news is that the last time inflation hit these levels, interest rates had to rise into double figures to shore up the pound before the rate slowed.

The only people who still think that the country is enjoying low inflation are resident in No's 10 and 11 Downing street.

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