20/04/2014 - Wages and Prices - Lies, damn lies and statistics

rpinotocpiIf you believe the media the recession is over and we are now in an economic recovery! They say that average pay rises have finally overtaken the official inflation rate. So you should be feeling quite well-off. Are you?

Probably not. So why the gap between media talk of rising wages and the reality on the ground? Have you heard the phrase “lies, damned lies and statistics”?

It all starts with how you measure the cost of living.

New Labour's replacement of the RPI (Retail Price Index ) measure, which includes housing costs, by CPI (Consumer Price Index) which doesn't has always understated the rate of inflation for working people.

CPI leaves the costs of your home out of the basket – so rises in mortgage payments, rents, and council tax, which in real life you pay, don’t get reflected in it. The RPI does take account of those costs.

There is a mathematical difference as well. The RPI calculates its ‘proportional difference’ using the arithmetical mean between the old price and the new, the CPI uses the geometric mean. Sounds boring but it is just another way the government can get a lower inflation calculation.

It’s important how you measure inflation as lots of payments are linked to inflation – pensions, benefits, index-linked savings... The higher the inflation figure, the higher the payments.

RPI almost always gives a higher figure for inflation than CPI does. Put simply you lose out if CPI is used rather than RPI (as now) and the government gains.

RPI records an inflation of rate of 2.5 per cent, indicating that the burden of housing costs weighs heavily on ordinary people, especially since wage growth (excluding bonuses that apply to a small section of the workforce) is just 1.4 per cent. 

So if was calculated (as it used to be by RPI) wages increases would be much lower than inflation. 

Every month for the past six years rising prices have outstripped wages.

Recovery? What recovery?