Measuring inflation better could save billions

Some thoughts on how much the government could save, based on approximately how much it could have saved over the last 10 years, if it had measured inflation more accurately.
ronanlyons.com/2009/11/03/wh … rs-should/

Highlights:

  • the CPI overstates inflation by somewhere between 0.8 and 1.6 percentage points each year (not my work, the Boskin report’s work)
  • the Government here will pay out this year over €40bn in pay, pensions and benefits to public servants, pensioners and social welfare recipients, about twice as much as it paid in 2002 - about 30% of this increase is due to the measured increase in the CPI
  • if the Government had more accurately measured changes in the cost of living since 2001, it could have saved a total of almost €13bn, a figure that coincidentally matches the Government’s estimate (as of April) of the gap between net spending and tax receipts this year

Thoughts, comments and questions, as per usual, welcome.

Ronan, it is a fair jump to assume CPI inaccuracy in Ireland based on a 1996 Boskin report based on US metrics. It might be more realistic to ask why the CPI Index has anything to do with national pay agreements, a case of the tail wagging the dog so to speak. Using CPI as a basis for minimum wage increases which in turn provide upward pressure on CPI is a never ending circle of cause and effect.
CPI should primarily be used by regulators and central banks to control money supply to avoid peaks and troughs and by goverments to project budgets, unfortunately omitting such minor cost such as rents, residential housing prices, transportation, medical costs, etc. (not so sure the exact components of the CPI in Ireland but assume these have been conveniently removed) has distorted real CPI figures. The US is a great example, Peter Schiff and others have written extensively on it.

Hi jabaar,
Point taken, but it is at least an equally fair jump (and I would argue a larger one) to assume that an index not even designed to measure changes in the cost of living (the CPI in Ireland) is appropriate for use as that purpose. The other work-around is of course to set your zero-axis somewhere else. Hence, the ECB use 2%, not 0% (or even 1%) for price stability. Overall, I’d rather account poorly for an error in measurement, using the best international evidence and research, than not account for it at all.
Naturally, a distinctly Irish estimate is less of a blog-post and more of a thesis but it’s no harm to get a handle on the approximate size of the problem.

As for the other point, about CPI and wages, you’re preaching to the converted!

Just had a look through the CPI Detailed Sub-Indeces

cso.ie/releasespublications/ … nt/pic.pdf

img337.imageshack.us/img337/3180/cpitable4.jpg

Everything is going to be fine, costs for housing and energy are falling 28% per year, more than 40% for rents and housing alone XD

Inflation is always under estimated by central banks and governments,the basis of fractional reserve banking under which the west operates under,means inflation slowly steals 3-%% of everyone’s wealth every year,the coming hyperinflation will boost that theft to around 30% per year.If governments and banks reported the figures accurately,people might start to cop on,hence the fraud.

If the cost of mortgages was taken into account the rate of inflation would be much bigger. High house prices are why wage levels are high.

I am surprised that an economist, (Ronan Lyons) thinks inflation has been over measured. I thought it was under measured, and so do people with an interest in house prices.

CPI is a mess, the original point that CPI (as measured) overstates real inflation is valid as the index is not flexible enough to take account of changes within the sample population, this was the assertion of Boskin.
However, the fact that CPI does not include important asset prices and peripheral services and selectively includes items which are disproportionately impacted by interest rates makes it an unreliable measurement of true inflation as seen by it’s inability to measure the bubble in Ireland.
Wages should be determined by measurements of competitiveness versus other countries, CPI should have nothing to do with it.

It’s the biggest purchase most people ever make, costing a third of income or sometimes more, it seems absurd Ireland was recording inflation rates around the 3% mark in the midst of the most enormous house price bubble.