As David Smith argues, the latest inflation figures may be a game changer, and we should look to the figures excluding the effect of indirect taxes (for the rest of 2010) as an idea of what ‘core’ inflation is.

Here is a handy chart, with appropriate labelling.

I am curious to see how Guido covers this.

UPDATE: If you want a different view, the title of Simon Ward’s post says it all:

http://www.moneymovesmarkets.com/journal/2010/3/23/uk-inflation-down-as-expected-but-likely-to-remain-sticky.html

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5 thoughts on “What inflation, exactly?

  1. The radio news (courtesy of Sky, who run ClassicFM’s news now) covered it thusly:

    “The cost of living has fallen, with the Consumer Prices Index falling to three percent in February from three and a half percent in January.”

    Epic fail. Disinflation does not equal deflation!

  2. I wish I could pretend I was surprised, but given the standard level of understanding, that is only a 4/10 error …

  3. Why is it best to exclude indirect taxes from the inflation measure? I don’t recall hearing that argument in early 2009 when inflation on that measure was almost 5% – as I recall the Bank talked then about ‘seeing through’ the VAT reduction, but if that’s the case they were running an extraordinarily loose policy. Maybe the increase in VAT back to its previous level has reduced suppliers’ ability to pass on cost increases to consumers for the time being, but that can’t be relied on to continue to be the case.

    1. I think the graphs show how it produces an artificially and predictably low figure at the beginning, and artificially and predictably high figure for the end. If you are trying to discern demand trends, I don’t think it is useful.

      The highest it got to was the same as the CPI peak in 2008, when inflation was all about massive commodity prices and a weak pound. I personally was wrong back then about the overall message being sent by the inflation markets – more Besley than Blanchflower, I’m on a learning curve here. But it would not have been the choice of CPIY or CPI that would have made the difference.

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