Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Due for 9-10% Pull Back? - 25th April 19
Dow Transportation Stocks Sector Is Testing Resistance - 25th April 19
INSOMNIA i64 UK Best Games Festival Vlog of What it's Like to Attend - 2019 - 25th April 19
In Just 45 Mins., Learn to Spot New Opportunities in ANY Market for FREE! - 25th April 19
If This Pattern Holds True, the US Economy Could Face the Worst Stagnation in History - 25th April 19
8 Reasons Why Investment in Education Always Pays Off - 25th April 19
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

UK Flawed Inflation Measure Stoking Wage Price Spiral and Worker Discontent

Economics / Inflation Jul 16, 2008 - 02:22 AM GMT

By: Nadeem_Walayat

Economics UK inflation continues to accelerate after busting through the 3% ceiling in April, and hitting 3.8% in June. However the real rate of inflation being experienced by consumers is a function of the actual purchases made rather than the price of the wide ranging basket of more than 110,000 goods and services that the CPI inflation rate attempts to track. The reason for this is that consumers are feeling the relentless impact of rising fuel, energy, food and credit costs whilst at the same time impacted by asset price deflation as the housing market completes its 10th month in a bear market that has seen house prices now decline by nearly 10% from the August 2007 high or by an average of £20,000. In addition to this the UK stock market has lost 20% of its value from its 2007 highs.


Under these circumstances the consumers are less inclined to buy luxury goods and large ticket items which has impacted the high street as recent retailer statements of profits warnings such as by Marks and Spencer's illustrated. Therefore this has resulted in falling prices of luxuries due to the reason that prices are being cut due to the lack of demand and therefore masks the real rate of inflation in favour of government policy. The CPI also excludes large components that are increasing at rates far beyond the 3.8% official rate such as mortgage interest rate payments which have risen by 10%, and council taxes again up by amount greater than the CPI inflation rate, similarly other taxes are excluded such as stamp duty. Perhaps everything that is excluded from the CPI should become tax deductible so as peoples experiences more closely match the official CPI inflation rate?

The only way to truly track the real rate of inflation would be to follow the month to month actual purchases of several hundred families and individuals and weight the component goods and services in favour of changing consumer buying habits, which would result in a real rate of inflation rather than the current weighted average of all goods and services that tends to produce an official inflation rate that is perhaps half the true rate of inflation.

In the meantime, as a stop gap measure for a long-time I have advocated that a truer measure of inflation is the RPI index plus 1%, this implies that a more accurate current rate of inflation currently stands at 5.6% against the 3.8% official CPI inflation rate. This is supported by market interest rates which continue to trade above the real rate of inflation despite the bank base rate of 5% giving a negative real terms rate of return.

The effect of this is a loss of confidence in the official inflation rate which results in worker discontent, as employers both public and private sector attempt to link wage rises to the discredited official CPI rate of inflation. We have already seen public sector discontent at wage deals of less than 2.5%, in April teachers striked for the first time in 20 years and all the signs are that the UK is heading for a summer of discontent.

Today further strike action will take place across Britain by council workers which will lead to closures of schools, day care centre's and refuse collection. The demand is for a greater pay rise than the 2.45% offered with public sector unions requesting an inflation busting 6% rise as a clear sign that the dreaded wage price spiral is a real possibility.

However government Ministers and MP's requesting public sector workers to accept pay deals far below the official rate of inflation voted themselves a 4.4% pay rise just two weeks ago, and have lost all credibility with the public who are fully aware that Members of Parliament have their 'Snouts in the Trough' where MP's routinely allegedly fiddle their expenses by claiming tens of thousands of pounds for day to day living expenses such as allowances for unnecessary second homes, and the so called £24,000 per annum John Lewis shopping list for household items. The MP's voted against reforms of their expenses earlier this month which was seen as clear evidence that it is a case of one rule for the MP's and another for the electorate.

Recent articles on UK Inflation

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules