Are Prices Really Falling

[nheather]

I see that Consumer Price Inflation (CPI) figures are out today and show a fall from 3.1% in December to 3.0% in January.

And the Retail rice Index fell from 0.9% in December to 0.1% in January.

Now I can understand the Mortgage Interest Payments will have reduced but I don't get the general feeling that prices are falling.

Staying the same or increasing yes, but not falling.

Diesel for example - no doubt that it is lower than last summer but in December I was paying 93p and now I am paying 100p (7.5% increase).

Train fares are increasing.

My council tax has just gone up by 4%.

My weekly Tesco shopping bill is pretty much the same (and a lot bigger than this time last year).

What do you think - anyone here feel like prices are falling?

Cheers,

Nigel

[eric pisch]

the problem is the RPI and CPI are based on a handful of arbitrary items, the government messes about with them to make themselves look good

as the pound looses value imports become more exspensive and we import an awful lot of stuff

mortgages for many have dropped alot if you where not on a fixed deal

oil prices seam to have bottomed out and have risen a little along with the devalued pound is starting to push prices up abit.

transport fares and council tax always seam to go up at 2-3 times what salary's do (at the start of nulabore mine was £440 now its £2050 which is insane, how are low income family's supposed to find 2k extra tax a year ...)

indirect taxation increased from 97-07 by on avg 10k per family

so yeah regardless of the inflation figures everything seams to cost more year on year and we always seam to have less and less left each month.

[loz]

The CPI doesn't suggest that prices are falling. So I am not sure why you believe they are.

A CPI of 3.0 says that prices are on average 3.0% greater than a year ago.

A fall in the rate from 3.1 to 3.0 says the the rate of increase in prices fell by 0.1%, not that prices fell by 0.1%.

[nheather]

Because I understood them to be annual percentage rate - i.e. the rate of change over the last year.

If I am correct in this understanding then for the significant annual rate to fall between december and january would have to be acheived by a decrease in prices in January.

This is more the RPI than the CPI which I agree hasn't changed that much.

Cheers,

Nigel

[loz]

Originally Posted by nheather

Because I understood them to be annual percentage rate - i.e. the rate of change over the last year.

Yes, and they went up 3.0 since last year.

Originally Posted by nheather

If I am correct in this understanding then for the significant annual rate to fall between december and january would have to be acheived by a decrease in prices in January.

No. Prices didn't fall. The rate of increase fell. But overall, prices still rising by 3.0%

Say something went up inline exactly with inflation.
It was £100 dec 2007, so it would have been £103.10 in dec 2008 (3.1% increase)
Then in January it would have been £103.36 (3.0%/12), rather than £103.37 had inflation remained at 3.1%

Across the basket of course some things will have gone down in price, but overall, the basket went up 3.0%

[nheather]

I understand exactly what you are saying but I'm obviously not making myself understood.

What I'm trying to say is that for an annual rate to change significantly over the course of a month then something significant must have happened in that month.

An example with big and easy numbers to work with.

A widget starts off at £10 and increases at 10p per month

At the end of the year it is £11.20 - 12% annual rate

Now lets say in the next month the annual rate drops to 6% - how is that possible.

When a year ago it was £10.10, so if it has increased by 6% it is now £10.70


So yes, prices are still increasing but at 6% rather than 12%.

But in the last month the actual price fell from £11.20 to £10.70.

So what I'm trying to say is to acheive a significant slowing of annual rates usually requires an instantious price reduction over the last month.

As I said the CPI is not a valid case because it hasn't moved by much the Retail Index moved significantly over the coarse of a month.

Cheers,

Nigel

[loz]

Originally Posted by nheather

I understand exactly what you are saying but I'm obviously not making myself understood.

What I'm trying to say is that for an annual rate to change significantly over the course of a month then something significant must have happened in that month.

An example with big and easy numbers to work with.

A widget starts off at £10 and increases at 10p per month

At the end of the year it is £11.20 - 12% annual rate

Now lets say in the next month the annual rate drops to 6% - how is that possible.

When a year ago it was £10.10, so if it has increased by 6% it is now £10.70


So yes, prices are still increasing but at 6% rather than 12%.

But in the last month the actual price fell from £11.20 to £10.70.

So what I'm trying to say is to acheive a significant slowing of annual rates usually requires an instantious price reduction over the last month.

As I said the CPI is not a valid case because it hasn't moved by much the Retail Index moved significantly over the coarse of a month.

Cheers,

Nigel

Now I am confused.

I suggest we both go read National Statistics Online and come back when we think we know the answer.

[Epicurus]

Nheather is correct, for the inflation figure to fall to 3% there must have been some kind of price reduction, but to an overall level that is still 3% higher than a year ago (for this particular measure).

I can't say I've noticed it either, but interest payments will be a significant part of that.

[nheather]

Thanks for the backup.

Though as I said I don't think drop in the CPI is conclusive becuase it is too small.

For a drop from 3.1 to 3.0 it is true to say that the increase in January must have been 3.1% or less, but by no means did it have to go negative.

But for the RPI the change is more significant.

To acheive an annual fall from 0.9% to 0.1% in just one month that must be based on a price decrease in January.

Cheers,

Nigel

[loz]

well I am not convinced yet. Though we may be agreeing, but not realising it...

the CPI was 3.1 for december 2008
so price of x was 3.1% higher in dec 2008 than dec 2007

the CPI was 3.0 for January 2009
so price of x was 3.0% higher in Jan 2009 than Jan 2008

The prices didn't fall, they just didn't rise as fast.

If the price rise was uniform over the year (so the monthly rate is CPI/12)

Then
X= 100 in dec 2007
X= 100.258 in Jan 2008 (100 + 0.258%)
X= 103.10 in dec 2008 (100 + 3.1%)
X= 103.27 in Jan 2009 (100.258 + 3.0%)

(I think...)

So, in this case where the inflation has dropped by .1% the price has still actually risen

In your example of 12% and 6% inflation

X= 100 in dec 2007
X= 101 in Jan 2008 (100 + 1%)
X= 112 in dec 2008 (100 + 12%)
X= 107.06 in Jan 2009 (101 + 6%)

So, yes, in this case, in order to see such a large drop in CPU, the price has actually fallen from dec 2008 to jan 2009


See page 13 of http://www.statistics.gov.uk/pdfdir/cpi0209.pdf where it shows the index over the last 3 years.

[WHUFC]

House Price Crash forum

A very useful website for all the latest unofficial and official news

.

[nheather]

@loz

I think we are agreeing.

I keep admitting that the CPI hasn't slowed enough to represent a monthly price decrease.

But I did say that the RPI from 0.9% to 0.1% probably has.

In fact if something was £1000 in Dec 2007, then in Dec 2008 it would be £1009 (RPI = 0.9%).

In January it would be £1001.75 (RPI = 0.1%)

So by RPI, the prices must have fallen in Jan to acheive the annual RPI slow.

But I do agree that using CPI the prices haven't fallen in January.
Cheers,

Nigel

[loz]

Yes, but as long as the CPI is positive, the price will only have fallen in relation to the previous month(s), not overall for the year.

Only if the CPI is negative, has the price fallen compared to last year.

And in order to smooth out short term fluctuations, you have to compare the price over a long term like a year.

[LFC_SL]

Public transport has always risen annually. Less said about Manchester prices the better. Oyster card bus fares in London are a bargain in comparison

Train fares - with this latest rise in Jan 2009 a day travel card is exactly at the magic £5 mark with my student rail card. And past 3 annual rises has wiped out the discount for my west coast mainline trips (hope that made sense)

Food prices have risen steadily, though I feel the issue has been highlighted more since round about Gordon became PM (a coincidence then ). No its just the world food prices, grain prices etc. Just do as the middle classes and shop at Lidl with your marks and sparks or waitrose bag

[Epicurus]

I just wanted to add to this thread that I believe the CPI does not include mortgage payments or any other type of interest payment and this would largely account for the big discrepancy between the fall in RPI and CPI.