FALLING INFLATION with Rising Prices?

When you are told that inflation is falling, you would naturally expect  prices to be falling . That ain’t necessarily so!

Many years ago, when I worked for a very large bank, I sent a team of people into town in order to find out whether the average British adult understood percentages. The answer was a resounding “No!”

MOST of the people we interviewed had NO IDEA about percentages!

Banks, supermarkets and even the government know very well that most people are either thick or at best borderline thick as far as simple arithmetic is concerned and they take full advantage.

Supermarkets “mix and match” their prices, so that you need to have the brain of a Stephen Hawking to decide whether it would be cheaper to buy three bags of crisps for the price of two or perhaps two at a different price with  one free  or maybe six bags with 10% extra. By the time you’ve made several purchases like this, you can leave a supermarket mentally exhausted.

Banks will be paying you interest at anything from 0 .01% p.a to  3.00% with maybe an introductory offer of three months with an additional 1.5%. Interest on credits is calculated from the day AFETR your deposit but debit interest on withdrawals is applied on the day of the debit. When a bank returns a wrongly applied charge, will it also re-credit the debit interest? If it does – then at what rate? You don’t know? You’re not alone.

The Government will throw statistics at you through the medium of television, delivered by double-first Oxbridge Economics  graduates who have absolutely NO idea how to explain economics concepts – except to other economists. Percentage increases in GDP, percentages out of work, percentage decreases in the annual inflation rate. Percentage, percentages and even more percentages!

Which is better? a 10% discount and then VAT added or would you prefer the VAT to be added first and THEN take the 10% discount? If your energy bill tells you that the discount on your Gas is 5% and the discount on the Electricity is 5%,  how many percent savings will you me making in total?  What is 12% of £60?

Today, we have been told that annual inflation is on the decrease BUT we all know that prices are on the increase. How is this possible?

I am going to try and explain but in very simple terms.

Assume you bought a radio in January 2013 and you paid £95.70.  If you then went to the same shop in January 2014  (a year later) and the price of the same radio had increased to £100, the price would have increased or INFLATED by £4.30. which is an increase of 4.5%.  

Let’s now go back to February 2013 when the price of the same radio was £100  and assume one year later, in February 2014, the price  increased yet again, this time to £104. That means that the radio would have increased in price or INFLATED by £4, which is  4.o%.

So, coming back to this year, between January and February 2014 (in one month), the radio’s price has INCREASED by £4 but at the same time, inflation has DECREASED from 4.5% to 4.0%!

Therefore, we have a rising price but simultaneously, we see falling inflation.

The media are already mumbling something about “falling food prices etc” having caused the present fall in inflation.

It is nothing of the sort : Yes, falling prices do contribute but the way that the calculations are made can be the major contributor to the figure because it is calculated  in discontinuous annual slices. Today’s inflation figure depends on what the inflation figure was a year ago.

Having said all that, on this occasion, the CPI has actually decreased in one month

Mind you, as usual,  whatever the basis of the inflation calculation, it will still not stop the politicians from claiming all the credit.

(Unless, of course, the inflation rate goes up too drastically, which is when those pesky “external factors out of our control” come into play!