manipulation of Inflation Figures

Ever wondered why the inflation rate in your country is so low? I’ve often thought it was strange that price of things such as houses and oil have increased so much over the last 5 years given the low inflation environment we are apparently in. Of course, we’re told the price of things like TVs, DVD players has went down which is why the inflation figures are so low.

Today I read this article which went some way to explain why governments don’t want high inflation numbers. The article states that many government employed people are on inflation adjusted pay packages whereby their anual increase is related to the inflation rate. If you can keep this down, then you don’t have to pay them as much and billions can be saved. Sneaky eh?

Governments can achieve this reduction by changing what is included in the calculations for inflation. In the UK, the government changed from the Retail Price Index (RPI) to the Consumer Price Index (CPI) which doesn’t have a housing component. Houses in the UK have increased up to 300% in the last 10 years or so.

However, with inflation now leaking into other areas most notably food it will become harder to fudge the figure and central banks may have to start increasing their rates to reflect this (bond yields increasing in the last week point to this).

With the potential for higher rates, homeowners could face difficult time ahead with their mortgage payments increasing putting further pressures on house prices.