UK Essentials Inflation
The official UK inflation rate for all goods and services in September 26 is 3.5% (CPI).
But what about the stuff we spend most of our money on? Like rent, food, clothing, utilities, gasoline… what does that look like?
Well, here you go...
Food... 1.3%
Clothing...0.1%
Fuel (petrol/diesel)...29.8%
Water... 7.3%
Electricity... 3%
Household Gas... 9.8%
Rent... 4.2%
Why the difference?
Official inflation stats that cover everything are great for economists, politicians and statistics guys. But not much good for anyone else. For most of the population, the vast majority of spending goes on things like rent, food, energy, water, and clothing.
These spending items are swamped by other items in the inflation rate, because the official rate has to cover pretty much everything. That’s why official inflation is really helpful to professionals studying statistics, but not much help to the rest of us. (Official figures do apply 'weighting' to try and get round this problem).
By focussing on the main spending areas, we get to see what inflation really is for most of the population, struggling with bills.
And that shows us why the official inflation rate doesn’t seem right to most people based on their spending.
Why raise interest rates if inflation is going up?
In my view, contrary to conventional thinking, raising interest rates is not a sensible way to beat inflation.
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Raising interest rates increases costs, which itself increases prices. If costs and rates are seen as heading upwards, people change their behaviour to try and get a larger pay rise, or bring forward spending to save money. Which is the opposite of what the world's Central Banks are trying to achieve.
'Cool down the economy'
They’re trying to get people to spend less, in order to “cool down” the economy.
But "cooling down" the economy eventually leads to job losses, pay freezes, and government spending cuts as higher rates suck money out of production into higher debt repayment.
Businesses contract and start laying people off. In economic terms, this is seen as reducing the demand side of the inflation issue.
Why not increase supply instead?
It would surely be better to focus on the supply side of the inflation problem; improve productivity and invest in communities, housing and jobs. Thereby increasing the amount of affordable housing, goods and services on offer.
By improving supply, you beat inflation. That way, no one needs to lose their job or home due to higher rates, in order to 'cure' inflation.
The problem with improving supply is it is more difficult to achieve and takes longer to work; so Central Banks & politicians take the short route instead and support raising rates, even though this is painful.
I'm not saying never increase rates - I'm saying doing that without also increasing investment to solve the longer term issue of supply is the wrong approach. In my view!
Data Source:
Table 4 Consumer Price Inflation Tables
#2 in this series
