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Consumer Price Illusions

This chart from FT Money supply is neat:

… if you want an illustration of how useless the CPI is.

The graph is a little hard to read, but it says that the real price of “telephones” has flatlined since 2008.  (That means the price of telephones relative to the price of entire CPI basket.)  The full name of the CPI division which the FT used here is “Telephone and telefax equipment and services”.  We touched on this in the comment section recently.   The ONS think the actual (not relative) price of “telephone and telefax equipment and services” rose by 18.8% between January 2009 and March 2014.  Which seems like an absurd claim, given the improvements in e.g. smartphone quality over this period, never mind the rising popularity of free services like Skype.  OFCOM have more stats than you can poke a stick at for those interested.  I suspect the ONS simply can’t keep up with the high rate of substitution in this area.

The area which stands out in the graph is the cost of education.  Again, this is merely a statistical illusion.  This is what the IFS said about education in the CPI:

Education saw the fastest price increase of all CPI categories, increasing by 67% since 2008. The price change for this category was largely driven by increases in fees for higher education from October 2012. The impact of these fee increases was to push up the measured price of the education CPI category by 19% between October 2011 and October 2012, and by a further 10% between October 2012 and 2013. That said, the increase in the price of education as measured by the CPI arguably does not reflect the change in the total cost of education faced by individual students completely accurately. The ONS takes the price of education to be the cost of fees less any grants (but not less student loans).

However, in some ways, the loan system became more generous to students at the same time as the changes to fees were introduced, meaning that for many students the total lifetime costs of education are now actually lower than they were before.

Got that?  Total lifetime costs of education have fallen, and the measured cost of education went up 67%.

Categories: Inflation
  1. ChrisA
    May 2, 2014 at 06:01

    Some of the groupings seem a little arbitrary, I mean why group “housing, water and fuels” together as one package. Seems to me that they would be very different sectors.

    Health is an interesting one given we are continually told about run-away health care costs in the US. It is showing basically flat, I guess that is the cost to the consumer though, not the tax payer.

    • May 2, 2014 at 12:08

      Yes, it just happens the FT used the highest-level subdivision of the index.

      “Health” in the CPI basket is everything from sticking plasters to nursing home fees, basket details here: http://www.ons.gov.uk/ons/rel/cpi/cpi-rpi-basket/2014/index.html NHS dental and prescription charges are in there, but without looking at the weightings, most of that division appears to be market sector goods and services.

  2. May 27, 2014 at 13:15

    Reblogged this on Marginal Scribbles.

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