Aardvark

BBC NEWS | Business | UK inflation rate eases to 1.8%

Do you all remember when the RPI was the measure of inflation? Well the Chancellor (Brown) changed our inflation measure to the CPI. This is great news since wages are linked to the measure of inflation. The new PM is now bolstered by a reduction in inflation figures that means that the workers will receive lower wage rises.

CPI fell from 1.9% in July to 1.8% in August, below the government's 2% target.

RPI,which includes mortgage interest has risen from 3.8% to 4.1%.

Had we still had a Tory government, Labour would be up in arms about a 4.1% interest rate against a 2% target. It's a brilliant wheeze since instead of paying hard pressed mortgage payers the 4.1% that they need to pay the bills, big business friends of Labour can keep wage rises down to 1.9%. This equates to a pay cut for mortgage payers, the most active people economically, of over 2%.

If you haven't got a mortgage you will say that it doesn't affect you, but it does if house buyers/sellers/movers have had a pay cut since your property must fall in value to keep in line.

In the real world, where 8 million mortgage payers live, inflation is over double the government's figures. Cameron's Tories don't want to pick up on this for some reason, but it is important. Mortgage interest rates are no longer in synchronisation with the base rate and banks are having to make adjustments to take into account their exposure in other markets. UK mortgage payers will pick up the tab for the sub prime collapse which is forecast to cause 500,000 repossessions in the US next year. It's going to hurt the middle classes who will be offered less than 2% pay increases (all taxable - call it 1.2%) against an inflation rise that is over triple that.

The other thing to note is the size of the jump in the RPI - 0.3% in one month, when everyone was on holiday and before the Northern Rock wobble, equates to 3.6% per annum (a virtual doubling of inflation). This won't happen in an exponential fashion, but watch the RPI, not the CPI and note the divergence. You might not be directly affected, but your neighbours will.

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When in Woking do as the Wokes do.

"I do not wish to form my opinions by thoughtlessly quoting others; I wish others to support their opinions by sensibly quoting me." Paul Wesson (Aardvark) 13th April 2008

harryaldridge

1. Wages are not linked to inflation, but inflation expectations do influence pay awards. Generally pay rises are above inflation

2. RPI would increase as it includes mortgage interets payment which have risen due to interest rate rises

3. When brown switched from the 2.5% RPI-X (RPI - mirtgage interest payments) he introduced a 2% CPI target. Since historically CPI has run less than RPI-X, this amounted to a monetary loosening of 1% (i.e. equivalent to increasing the RPI-X target). This kept downward pressure on on interest rates and prolonged cheap credit.

evil man!!

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Aardvark

1. ..but the lower the inflation the lower the pay rise, even if it is slightly above the published figures. Tax and NI reduce the benefit of any pay rise. Public sector pay and pensions are more closely linked to inflation so low figures allows for low pay outs.

2. Agreed, that's the whole point.

3. Agreed, the point being that the change from RPI to CPI was to allow Brown to play financial tricks whilst ignoring the effects of 'real' inflation on the economically active.

One day it will all catch up on him, but it will be the ordinary tax paying punters who get hit hardest.

__________________
When in Woking do as the Wokes do.

"I do not wish to form my opinions by thoughtlessly quoting others; I wish others to support their opinions by sensibly quoting me." Paul Wesson (Aardvark) 13th April 2008