Consumer Costs and Inflation in Ireland Post author By Philip Lane Post date February 7, 2014 FORFAS report here. Categories In Uncategorized 21 Comments on Consumer Costs and Inflation in Ireland ← German court refers ECB bond-buying programme to ECJ → Grattan PhD Scholarships at TCD Economics 21 replies on “Consumer Costs and Inflation in Ireland” “Finally, education was identified in Chapter 4 as having very high inflation rates throughout the periods analysed. Despite its low weighting within the CPI basket it was a driver of inflation during the 2008 – 2012 period. Tertiary education (annual student contribution) accounts for two thirds of the weight of the education component. Continued high inflation is expected.” So the “inflation” in the Education sector is basically just increases in the government tax/ contribution from students. Glad to have that cleared up. “Continued high inflation is expected” is worthy of Sir Humphrey I think. Education is a good example of the limitations of this type of report. Most education in most countries is subsidised to a greater or lesser extent by governments, so its “price” is really a charge. If a government decided to have universities charge full price, but offered everyone a €10,000 grant would that imply high inflation? Hmmm, 1. page 2, second sentence: “approximately half of recent cost competitiveness improvements are accounted for by the depreciation of the euro against the currencies of our major trading partners” most folks say 1.24 Dollar for a Euro is “fair value” ( you can derive the US opinion from the CIA world factbook GDP in nominal and PPP values and the exchange rate they write for that year somewhere below) If you plot the exchange rate for one or a few years, The Euro overvaluation has actually gone up 2. page 3, Figure E1 That the price level of Ireland is still some 18% above EA-17 level, is not considered important ?? 3. page 9, “though imported inflation in the services sector has been higher” Huugh ? Since when are excessive dentist charges “imported”? 4. page 9 “Single European Market, further actions are required to create a free market in services generally” What should this mean in practice? Irish hair dressers and plumbers flying into Germany? There was one piece in the FT in the last year, they got a little specific, some ultra tiny , few million Euro per year stuff, and basically trying to kill our apprenticeship models 5. “develop a single European energy market.” Hmmm, what should that mean for Ireland, as long as you don’t have power transmission lines to mainland Europe, our electricity markets are irrelevant for you. Does Ireland charge some special fees on the oil it imports ? Or what should this mean in reality ? The whole thing pretty much sounds like the typical ideological drooling of the Financial Times or “The economist” Several instances in the report allude to the ‘challenges’ encountered in making (price) measurements. So they had to resort to, amongst other methods, ‘weighted average indices’. Which is actually an acceptable method to obtain a ‘meaningless’ mean. Of what practical use is that value? Sad stuff. The CSO measure over 600 items to get a CPI. That’s absurd. And what earthly use is it to compare captive prices (non-tradable sectors) in Ireland with any other country? Other than perhaps the UK, since we share a land frontier with the UK. What do folk spend on foodstuffs (basic stuff -not Donnybrook Fair stuff!); transport fuels; heating fuels; electricity; household charges and home insurance; mortgage interest? Now figure out the proportion of your income that is spent on these – for lowest earners to highest (not mean nor median). You need the ranges and median values. The mean(s) is unlikely to be ‘meaningful’. As an aside: In discussing ‘inflation’ (whatever this actually means), unless there is a serious accounting for the nett increase (decrease) in ‘money’ (again, whatever this means), all waffle about ‘inflation’ has little context. And there needs to be some estimate of the direction of movement of wage-labour rates (whole-time and part-time); salaries and of course self-employed incomes. You know. Put the matter of the price movements of necessaries* (there cannot be 600+ of these, surely?) in some sort of context that is not a load of gobbldygook to Sean and Maire Taxpayer. And no hedonic pricing estimates. * If there were 13 – 20 of these, they might capture 85% of spending, and that should suffice. Target a modest level of accuracy, not a pretentious muddle. May I propose on small measure that would assist consumers in Ireland. Mandate that all parking charges be measured in increments of 15 minutes. Remember the hoo-ha about mobile charges, when they charged for a minimum of one minute, The mobile companies were soon brought to heel. Yet carpark operators can get away with parking charges of €120 per hour pro rata. [Based on a one minute over time at a rate of €2 / hour]. Those car park owners and operators must be very connected people. 13 goods can’t capture 85% of all consumer spending from insurance to frozen peas to college fees. That hypothesis is completely absurd. @ DH: Go back and read 2nd sentence, para 3. Notice the nice word, ‘necessaries’. And its nay a hypothesis. Food items are kind of, well, necessary. Cooking fuel? Home heating fuels? Jeeze, do I have to spell it out for you? And think about the folk who will spend a high proportion of their income on those necessaries. That’s who matter. Not the suits in their bank-leased cars. @ BWS The Euro HICP and the US CPI / PCE ex food and energy for Fed purposes are just fine the way they are. There is some rapid hedonistic replacement, (nearly) nobody buys horse shoes or pig iron today anymore, and neither some IBM PC XT either. Whose price for canned tomatoes do you take? Lidl/Aldi or the 2x more expensive local store? or the 3x price Bio outlet. Some of you live in a 2 x SUV landscape home, you bought overpriced, others enjoy cheap rent in a bohemian quarter of a nice mid sized town. Who would be the judge, what would be the reference? Ergo, total market goes into the inflation measure, period. Simple to understand, actually. Hi francis. Thanks for confirming my opinion that attempting to measure XYZ or whatever economic alphabetic object you choose – is one unholy mess. If the world’s scientists can agree internationally accepted measurement units and dimensions, then what are the world’s economists doing? You have to have simple’, easy to understand measurement metrics, which are also easy to apply. Each country (or region) can adopt what suits. Attempting international contrasts is virtually impossible – useless! Except to economists. They really must like pi**ing down their own legs. You MUST have a ‘reliable’ measurement if you wish to use quantitative results for a serious purpose. And measuring the nett addition of money into an economy is surely important. But prices??? That measurement metric is NOT reliable – hence useless [except you are very, very nitpicky]. And all the statistical massaging using the latest iPaddles will only produce a better, more refined, denser pile of ‘mist’. The Egyptians used Cubits. The UK used to use Imperial and BSF. Europeans used metric, still do. The US still uses Imperial. Remember that little mixup with the A350 wiring harnesses? That’s why you need an internationally agreed measurement scheme – even if its fiendishly simple. What economists have is a gargantuan muddle. Economic advisors are using their unreliable quantitative measurements to make economic policy for millions – millions, of folks. That’s very unfunny francis. The US uses Imperial but in practice a majority of their products use Metric. To compete internationally they have little choice. The Kansas City kid (Bill Black) takes on the Troika. neweconomicperspectives.org/2014/02/troika-new-york-times-bury-issues-just-lead.html @Brian Woods Para 3 original post spot-on! But your suggestion is far too simple and useful and offends the sensibilities of serious economists and statisticians because it works in practice and offends theory…. @ Brian and Vinny, how about you try to construct your index yourself and then propose it here? If it works, you could become famous : – ) “The men who invented the simplified index” @ MH: Thanks for that update – and WB link. I would hate it if he were on my case. @ Vinny: Thanks. I thought that. Hi francis – both up early I see! Bit gloomy and damp outdoors, but the Douwe Egberts is brewing nicely. Fresh croissants in the oven. Constructing a reliable – and that is the key term, quantitative determination method should be fairly straightforward. I’ll just ask Mrs B Woods Snr. over the coffee and croissants. Prowls the shops on a daily basis. Amazing memory for prices. And ALL my best friends no longer appear embarrassed when we meet in Lidl! As an aside. Renault-Nissan have a new passenger car (semi-jeep really): Dacia. Its price is 25% – 30% LESS than the equivalents. Would our hedonistic statistical data mincers claim that that was ‘deflation’? Or is it just a really clever marketing strategy – maintain sales in the face of ‘deflating’ incomes’. Its a cash/credit sale. No trade-ins accepted. Nifty vehicle. Mrs B Woods Snr. has one! 😎 Ask the ladies, francis, not the lads! To construct your own inflation index is a very useful exercise. I did that once for myself, back in 1998 for the first time, especially for comparing costs in the US and in Dresden here, and taking Lidl / Aldi prices is actually helpful. I repeated this in 2011, both here and in the US. While I agree with the CIA on that 1.24 $/Euro is close to the standard 4 person household profile, my personal consumption would probably be more like 1.45 at the East coast, and 1.8 in California. Something useful to know, when you ever consider moving. And you learn about the severe limitations of simplified approaches. Reducing the total market to a few dozen symbolic items would just lead to endless discussions about the construction of the index. A useful link: http://www.numbeo.com/cost-of-living/comparison.jsp Dacia is actually a brand, and not a model, the low cost version of Renault, but not exactly built the same as I understand. Volkswagen does something similar with the Skoda brand. Their Octavia is the favourite car stolen here around : – ) Just to set part of the record straight around here, I regard inflation/deflation as an increase/decrease in the money (every form, including debt) supply. Money is a straightforward, dimensionless counting unit. Or if you prefer, money is a Fundamental Unit. Just supply the basic data: the total amount in circulation is …… A breakdown of the different types of money would be very useful too. However there be a little problemo. Folk might add 2 + 2 and get 3 – they realize that emitting more virtual money just depreciates the existing stock. Purchasing power – “Going down!”. Hmmmmm. Prices are entirely a different matter. Price is a derived unit with the dimension of Unit of Currency (aka:money) per unit object, item, unit weight or unit volume – with the added confusion and complication of substitutes and quality. Use the money supply to measure inflation/deflation. But by all means publish a weekly list of the prices of a fixed set of necessaries. Select the necessaries on the basis that they are likely to capture 85% of the after-tax household budget of a single adult, working 40 hrs/week on min wage. Let folks do their own adjustments for other family sizes (publish a simple ready-reckoner). If a particular item is not available, leave it out – publish what you have. If there are cost differences across several retailers – publish the Hi-Lo of the range. Call it the Weekly Consumer Price List – not Index! And be satisfied that the citizens are getting some reliable data – that they can immediately identify with. It would be very popular – you could even have a competition to guess the next weeks prices – or deltaP. Ask Paddy Power to organize it. @ francis: “And you learn about the severe limitations of simplified approaches.” Occam’s razor? Some so-called simplified approaches are anything but. Cheers. @Brian Woods Sr + Francis The late great – oh, he’s still alive – Alan Greenspan wittered on about the CPI/hedonic issue back in 1998 http://www.federalreserve.gov/boarddocs/speeches/1998/19980103.htm. It became quickly known as his tennis racket speech. @Brian Woods Sr – prices can, and often do, rise independently of an increase/decrease in money supply. By times, MS can be the tail, by times it can be the dog. We could go back to the 1980s and start debating the TRUE measure of money supply – at one stage in the UK there up to 10 competing (monetarist) measures and camps in the UK alone. I think there was even a Liverpool School in competition with the Chicago School – it’d remind you of the heydays of Zwingli, Hus, Luther, the Huguenots, the Albigensians, Savonarola, Cromwell and the Spanish Inquisition, all crammed into one little decade, or part thereof. With added Wah’habis, Shias and Sunnis. Perhaps the principle of the ‘Big Mac’ Economist newspaper index could be used as a starting point for the Brian Woods consumer price index…. @ Vinny: Please go back and read sentence #7, final para. Thanks. I will not advocate, promote or support any particular economic idea, theories, hypothesii, rules, so-called laws or -isms. Some appear to have some basis in reality, some are just silly, but others are plain hazardous. Its a very unfunny situation for millions of folk who are on the shi**y end of economic policies – for what? Who benefits from such behaviour? If our Anglo-Saxon academic economists continue with their espoused policies – especially their unstated Permagrowth economic paradigm: then expect unpleasant outcomes. And you know what? The difference between Right Economic Policies and Left Economic Policies? Carbon monoxide and hydrogen cyanide. Nice menu choice that. @ Airman: Hedonic pricing is utterly unbelievable. What nature of intellect could dream it up – then keep it alive. Dr Frankenstein, I presume. Long time since I saw someone mention the Wah’habis. Nice guys! God’s Terrorists!* * cf: Charles Allen. Aidan, I think I remember how some US media scoffed at Greenspans speech, which is just stating the obvious. At first I found that “hedonistic adjustment” also a little weird, and 1997 was the first full year I lived in the US, so it was the right time to take some stock, create some overview, how much I spend on what, constructed my first own index, how much is that relative compared to Germany, how much do I save, how to invest. And after a little bit of systematic thinking, it becomes very clear that the price index has to take the whole market into account, do the constant adjustment, and that there are some residual difficulties, which have to be solved as good as possible. At that time I bought the Wall Street Journal Almanach 1998, where they (BLS) had a CPI-U, CPI-W, an experimental CPI, a producer price index PPI, CPI ex food and energy. The Fed PCE did not exist at that time, nor did the Case-Shiller Index (CSI), which tried to measure housing prices in a better way than the FCHA. Housing represented 41% of expenses at that time, no wonder with a 15-yr mortgage rate of 7.5% : – ) Well, until we have something with the quality of the CSI in all Euro states, it will take a few more years. Your money volume idea (it was called M3 controlling) was actually tried to be used in the first years after the break down of Bretton Woods, but even the Bundesbank basically gave up on it in the mid-80ties, because it doesn’t work, too much change in the velocity of money, and leakage to other areas. But it reminds me of these market monetarists, with their NGDP ideas, Scott Sumner and company, also railing against the inflation index. On the day I realized in discussions with him, that I understood the US system at least 1 order of magnitude better than him, and he had no clue about our HICP, how and why, me the foreign amateur, and he the US economics professor, I began to understand the tremendous self centeredness and ignorance of stupid American economists. This stuff is not “rocket science”, all it requires is discipline, precision, looking at the facts without ideological bias, do your homework, systematic, sustained labor, long term thinking. FYI, or more likely just for reference, if somebody reads this showing the folly of NO hedonistic adjustment : – ) ‘was not because the old inflation numbers were wrong. Rather, it was because they needed to be updated. Why? Because Argentine consumption habits had changed, he explained. The government’s new inflation numbers, he added, provide “an X-ray of another country.” ‘ http://blogs.ft.com/beyond-brics/2014/02/14/argentinas-rare-outburst-of-sincerity/#ixzz2tK48VrbT Email firstname.lastname@example.org to buy additional rights. Comments are closed.