Inflation

I wish the general public had enough economic literacy to demand that journalists and politicians use - where relevant - the term 'CPI' instead of 'inflation'.
Mike Moffat reports a readers unhappiness with About.com's definition of 'inflation':

I suppose if you are using the new definition, according to Merriam Webster’s dictionary, inflation is the increase in the price of a basket of goods. However, for hundreds of years the inflation – even in Webster’s, was increasing the money supply. It seems like an odd coincidence that the definition was changed and that it just happens to prevent inquiring minds from figuring out that inflation is something the Federal Reserve knowingly does, rather than something that “just happens.”

If you seek proof of this claim, simply look in an old dictionary. I know that as late as the 1980’s, inflation was still defined there as “increasing the money supply.” You will find the same definition in dictionaries from the 1950’s, 1930’s, 1913, and so on. It is only recently that the definition has changed. Didn’t George Orwell write about changing the meaning of words as a tool of the totalitarian state to prevent people from having ideas that were dangerous to the state?

I've previously mentioned Gordon Brown's decision to use the CPI as the proxy for inflation instead of the RPI (here and here).

Addendum: Here's a graphic from a recent Economist, "If RPIX and the former target of 2.5% were still being used, Mr King would once again have had to explain an embarrassing overrun."

 

Comments

[Quinn]

Isn't the RPI is as much a proxy for inflation as the CPI?

[Neil]

Quinn,

It is used as a proxy but is a more accurate reflection of rising prices as it takes into account mortgage payments and utility bills. Brown's decision to use CPI is presumably based on the fact that the "inflation" figure looks better for him.

Neil

[Quinn]

Well, mortgage payments were dropped from the headline inflation figure by the Conservatives when they moved from the RPI to the RPIX, the explanation given being that the inclusion of mortgage payments would be distortionary when targeting an inflation rate (since a deflationary measure such as raising interest rates would immediately show up as a rise in inflation on the RPI.) Labour then moved from the RPIX to the CPI, as I understand it, because that is an international standard that can be used to compare inflation across different countries.

Undoubtedly the government will prefer the CPI while it is the lower measure; for similarly obvious reasons certain other groups – such as union wage negotiators, or the government’s opponents – will prefer to refer to the RPI while it is the higher measure. But surely they are just measures; neither is inflation, neither one is better than the other, they are just different.

[aje]

Quinn - I agree, so why can't journalists say "the CPI is 3%" rather than call it 'inflation'?

[Quinn]

"Why can't journalists say "the CPI is 3%" rather than call it 'inflation'?"

Many do, but when they don't I reckon it is usually down to those solid jounalistic stand-bys of laziness and ignorance.

And by the way, perhaps the general public don't demand journalists and politicians use the term CPI because they are generally savvy enough to work it out for themselves?

[aje]

Perhaps - but it's my understanding that the consensus view of the general public is that Gordon Brown had a good record for inflation whilst Chancellor. 3 years ago when they saw the 10 o'clock news say that inflation was 2% I doubt people were thinking "well the CPI might be 2% but inflation is much higher! I better reign in my credit card spending".

[Quinn]

To be honest, I think that whether you judge him by the CPI, the RPI or the RPIX, Gordon Brown did have a "good record" on inflation while Chancellor, although it is moot just how much credit he deserves (and how much criticism he deserves now.)

I am sure that the headline inflation rate does have a marginal effect on consumer spending, and so a lower CPI compared to a higher RPI may cause a ripple, but I imagine our own individual inflation rate - alongside other personal circumstances such as a job loss, a promotion or a financial windfall - has a much bigger impact

[aje]

'Moot'? The guy is claiming that we should trust him because he'll be able to lead us through difficult times caused by 'other countries'. You really buy that?