Sunday 28/7/2019


I did consider withdrawing this post, but it has made me look at ‘Measuring Worth‘ in a new light and is useful to me. Specifically it made me consider how complex the issue of inflation actually is in a fiat money world. Especially in the light of the Retail Price Index and the Consumer Price Index that comprise the items making up the UK’s ‘shopping baskets’.

The best that I could do was to measure the value of one pound (UK) using three sequential periods from 1947 until 1970 and from 1972 until 2018. I missed out 1971 as it was the year that fiat money was introduced into the global economy. Even so the cost of inflation to the consumer for a basket of goods not included in the RPI or CPI indices was hard to identify. This is particularly true of groceries that are considered to be a necessary expenditure. Food is approximately 10% of the basket depending on the percentage variability of the other included items.  The following notes below point out that measurements of inflation are based on a fiscal policy that is related to the RPI, CPI indices.

My intention was to illustrate the cost of fiat money introduced in 1971, but to which I could add the welfare costs of high unemployment and government fiscal policy. The last 23 years would suggest falling inflation from the £6.86 of the previous 23 years, to the £1.89 of the last 23.

However, it very much depends on the governments basket of goods and services and their fiscal policy.  A simple review of the last 23 years indicates how ‘commodity’ prices have fallen quite dramatically, but it is less of an indication of inflation than an indication of ‘commodity’ worth and what the ‘commodity’ is. It is also an indication of an increase in unemployment and the corresponding social welfare programme expenditure.

Certainly ‘project costs’ have fallen quite dramatically, especially during the last 23 years. Allowing for inflation (post the introduction of fiat money in 1971) this suggest both a reduction in the labour costs and the number of labourers involved on a project. The problem with trying to measure inflation is that it involved both the employed and the unemployed in the distribution of economic growth and the distribution of a social welfare programme — not something taken into account by the RPI.

  1. A simple Purchasing Power Calculator would say the relative value is £2 10s   7d. This answer is obtained by multiplying £1   0s   0d by the percentage increase in the RPI from 1947 to 1970.

  2. A simple Purchasing Power Calculator would say the relative value is £6.86. This answer is obtained by multiplying £1.00 by the percentage increase in the RPI from 1972 to 1995. 
  3. A simple Purchasing Power Calculator would say the relative value is £1.89. This answer is obtained by multiplying £1.00 by the percentage increase in the RPI from 1995 to 2018.

The rate of inflation is the change in prices for goods and services over time and using the RPI suggests rising inflation at 2 above compared to 1 above and falling inflation from 2 to 3. From a government’s fiscal policy intent this is quite true, but using RPI to obtain such figures is misleading. They fail to reflect the purchasing power of the consumer in the rising cost of purchased items (especially foodstuffs) and to take into account the cost of social welfare spending (especially rising unemployment) which is funded by the government.

Measures of inflation and prices include consumer price inflation, producer price inflation and the House Price Index. Inflation and price indices. 

The real problem is that measuring RPI and CPI are tools of the government used to portray its fiscal policy in a way that is beneficial to them, particularly in how they portray public debtThe difference between CPI and RPI inflation — and why it matters


1. 1947 to 1970 (23 years pre fiat money)

In 1970, the relative value of £1   0s   0d from 1947 ranges from £2 10s   7d to £5   6s   7d.

If you want to compare the value of a £1 0s 0d Commodity in 1947 there are four choices. In 1970 the relative:
real price of that commodity is £2 10s   7d
labour value of that commodity is £3 17s   7d
income value of that commodity is £4 14s 11d
economic share of that commodity is £5   6s   7d


If you want to compare the value of a £1 0s 0d
Income or Wealth , in 1947 there are four choices. In 1970 the relative:
real wage or real wealth value of that income or wealth is £2 10s   7d
labour earnings of that income or wealth is £3 17s   7d
relative income value of that income or wealth is £4 14s 11d
relative output value of that income or wealth is £5   6s   7d


If you want to compare the value of a £1 0s 0d
Project in 1947 there are three choices. In 1970 the relative:
real cost of that project is £2 11s   1d
labour cost of that project is £3 17s   7d
economic cost of that project is £5   6s   7d


2. 1972 to 1995 (23 years post fiat money)

In 1995, the relative value of £1.00 from 1972 ranges from £6.86 to £11.98.

If you want to compare the value of a £1.00 Commodity in 1972 there are four choices. In 1995 the relative:
real price of that commodity is £6.86
labour value of that commodity is £9.85
income value of that commodity is £11.58
economic share of that commodity is £11.98


If you want to compare the value of a £1.00
Income or Wealth , in 1972 there are four choices. In 1995 the relative:
real wage or real wealth value of that income or wealth is £6.86
labour earnings of that income or wealth is £9.85
relative income value of that income or wealth is £11.58
relative output value of that income or wealth is £11.98


If you want to compare the value of a £1.00
Project in 1972 there are three choices. In 1995 the relative:
real cost of that project is £7.26
labour cost of that project is £9.85
economic cost of that project is £11.98


3.1995 to 2018 (another 23 years post fiat money)

In 2018, the relative value of £1.00 from 1995 ranges from £1.55 to £2.50.

If you want to compare the value of a £1.00 Commodity in 1995 there are four choices. In 2018 the relative:
real price of that commodity is £1.89
labour value of that commodity is £2.03
income value of that commodity is £2.18
economic share of that commodity is £2.50


If you want to compare the value of a £1.00
Income or Wealth , in 1995 there are four choices. In 2018 the relative:
real wage or real wealth value of that income or wealth is £1.89
labour earnings of that income or wealth is £2.03
relative income value of that income or wealth is £2.18
relative output value of that income or wealth is £2.50


If you want to compare the value of a £1.00
Project in 1995 there are three choices. In 2018 the relative:
real cost of that project is £1.55
labour cost of that project is £2.03
economic cost of that project is £2.50

 

 

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The Land Is Ours

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This site was created for members and friends of My Telegraph blog site, but anyone is welcome to comment, and thereafter apply to become an author.

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The Real Economy

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