Alternative inflation report – how other countries are doing it better

Our last couple of reports have focussed on the unexpected wave of inflation that is being felt around the world despite us supposedly being involved in a global downturn, and how the UK is particularly feeling it.

This month we are focussing on how other major G7 countries measure inflation as it impacts upon different parts of their countries and social structure. Something we want to see done here in the UK and are currently pressing the Statistics Authority for.

The USA gives out the most comprehensive set of inflation figures every month. This month the CPI-U, representing the broad urban population is  1.1 % .  But it also gives a CPI-W figure for ‘urban wage earners and clerical workers’ which this month is  1.4  %. But they don’t just give a national figure for each of these populations. They also give a CPI-U figure and a CPI-W figure for most of their big cities and the US census regions.

This has made the USA very sensitive to emerging inflation and has prompted the USA to be one of the world’s lowest inflation economies.  A worker in Chicago and the Mid-West knows whether his prices are rising in line with the official figures for his area, in a way that someone working in Birmingham England cannot because we only get a couple of different national disembodied averages for our official figures. So if the figures are out of proportion with what workers are finding in the American cities the figures can be challenged in a way they cannot be in the UK.

Although the monthly figures can vary quite a bit across the US, in the longer run their system keeps them in line. On the basis of the index running since the early 1980s, price rises for Chicago have risen less than for the US as a whole.  But only by a couple of per cent over what is now a whole generation. (USA average currently at 218 and Chicago at 213)  Prices for the workers have risen less than for the broader population – 214 for the US and 206 for Chicago workers, despite the current monthly figure being higher.

France also has an index that is intended to represent the total population aswell as  one that represents what is called an urban household  headed by a worker. It is particularly used for adjusting the minimum wage.  For August inflation was 1.4 % on both indices. Until the 1960s France used to only calculate an inflation rate for Paris and say that that was the French inflation rate. But they continued to maintain a Paris index until about the time the Euro was launched.

The French have been able to keep inflation for these worker households in step with that of the overall population. Below you will see the figures showing how prices have shifted in the first years of the Euro before any of the dramas of recent years intrude into the story.  In the table below 100 = 1998.

The figures are very much in step, as were the US figures because a more sensitive approach to tackling inflation tends to  follow from such detailed indexing.

The Italian indices for registering inflation are today pretty much identical to the French system. In August the inflation rate for the broadest population was 1.6 %, as it was for workers’ families. Unfortunately the Italians no longer translate their full monthly release.  It can be deciphered with only a basic French/Italian at the link here.

Table 4. of the Italian monthly release gives inflation rates for most of Italy’s big cities. This is most probably because  inflation indices were first started by the big industrial cities like Milan, and led by Milan. It was Mussolini who brought in the national index, almost certainly because it would justify lower pay settlements for workers in the industrial cities than the local city inflation rate would justify.

So a basic local figure does since act as a double check on the system – as it does in the USA.  Milan is Birmingham’s twin city and inflation there is slightly less than the Italian national norm being currently registered as 1.4 %.

German inflation for September is 1.0 %. Germany now only does one figure for the broad population of Germany. But most of the large federal states produce a figure for their own local population since the 1960s.  The State of Hesse, which is home to Birmingham’s twin city of Frankfurt has an inflation rate which is slightly lower at 0.7 %. We also have a twin city in the former East Germany which is Leipzig in the state of Saxony. The Saxon inflation rate is currently higher at 1.1 %

However, Germans have lost trust in German price statistics since Germany went into the Euro in 1999. This is because the German government abandoned its more extensive range of monthly inflation indices. Former West Germany had produced price indices based on 4 household types across Germany. They were as follows

The old West Germany ran such sub-headings since the 1960s when the managerial household was added to complete this set. When the West  took over East Germany in 1990 they began to run a parallel set of sub-indices for there. By 1999 when these sub-indices were abolished along with the D-Mark, they were holding the inflation rates for all these households remarkably in step in both the former East and West Germany. Based on 1995 being 100, the family households in both East and West were at 105 on the index, and the ‘All household’ indices and the pensioner households were on 106.

Germany abandoned these baskets when they entered the Euro. They said this was because there were not enough 4 member families to justify it. But had they assembled a more contemporary basket for families they might have maintained  the confidence that there had been in the old system.

From what has been shown here of how other G7 countries register inflation, you will be able to appreciate the basis of what we are proposing to the Statistical Authorities should become our framework of inflation indices.

Our last monthly report can be found here.  This month the UK figures have not fallen like most of the G7 figures have, as can be seen in the list below. The UK remains the country with the highest rate in this group, and has long been in this position.

Andrew Lydon

Regional Prosperity & Inflation Project

This month’s comparable inflation figures are currently

United Kingdom                3.1 %

Canada                           1.8  %

France                           1.7  %

Italy                               1.6  %

USA                                1.1  %

Germany                         1.0 %

Japan                            -0.9 %