To say I’m not an economist would be a gross understatement. In fact, I did a lesson and a half of Economics at A Level before running away screaming from the classroom and what would have been a huge mistake. So I’m hoping someone else can explain something that’s genuinely making me bang my head against the wall.

The Consumer Price Index for inflation is edging closer to the 3% level, at which point large alarms go off at the Bank of England and all the members of the Monetary Policy Committee have to sit in a room facing the wall with their hands on their heads until it goes down (OK, they have to write an explanatory letter to the Chancellor). The Retail Price Index went up to 4.6% last month from 4.2% in January. The RPI shot up so heavily largely because of the increase in mortgage repayments, because of recent interest rate rises. I think I’ve understood that the Bank bases its inflation calculations on the CPI, which doesn’t include mortgage repayment figures, not the RPI, which does. But I’m assuming the two figures are somehow linked in the ‘real world’ – ie, I can’t imagine the CPI going down while the RPI goes up.

So why, then, would the MPC consider raising interest rates again when that’s one of the main things pushing up inflation? Does people spending more on their mortgages mean they have less to spend on other consumer goods that are included in the CPI, thereby theoretically driving prices down? And wouldn’t that mean that the differences between the CPI and RPI are completely artificial and that basing interest rate decisions on one and not the other is fairly meaningless?

My head hurts. This is why I concentrated on social history. People are relatively simple to understand…


One response to “Figures

  1. Pete March 22, 2007 at 8:25 am

    I can’t claim to be an economist, but I did go out with one for a few years and something must have rubbed off.
    Raising interest rates has a downward pressure on prices because it becomes more expensive to borrow money.
    Consider the size of the house you think you can buy – if interest rates are low you would borrow more and get a bigger house because you could afford the repayments. If the rates are high, you’ll either wait for them to come down (when you can afford to borrow more) or borrow less so you can afford the repayments. Either way you’ll spend less on a house now, which means the estate agents can’t mark the prices up as much this month.
    It’s the same with credit cards. When the interest rates go up, your repayments on debt go with it, so you should think about paying off the debt instead of running up more. This should lead to people buying less stuff, which means stores cut prices to pull them back in and convince them they can afford to shop.
    So that’s the link. Including the cost of borrowed money in the CPI would make it less useful when you’re trying to use it to limit growth of prices.

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