From: Ronald Raygun 
Subject: Re: Please :- what is the current headline rate of inflation??? and what is the current underlying rate of inflation???
Newsgroups: uk.finance
Date: Thu, 04 Mar 2004 10:39:25 GMT

Stephen Burke wrote:

> "Ronald Raygun"  wrote in message
> news:esm1c.7583$bc.106495136@news-text.cableinet.net...
>> So it's right that CT should not form part of the housing costs element
>> of the measure of inflation, but nevertheless I feel there is an argument
>> that taxes (all taxes) should be included in the measure of inflation
>> in their own right.  After all, they are part of the real cost of living.
> 
> Well, the problem is that you're using the inflation measure for different
> purposes. If you're looking at indexation of pensions or social security
> benefits then council tax is relevant because people have no choice about
> paying it, as you say it's part of the cost of living just as much as milk
> or bread. OTOH from an economic view, e.g. for the BOE to target when it
> sets interest rates, what counts is the average value of money, i.e. what
> you can buy now with a pound compared with ten years ago. For that kind of
> use taxes are not relevant, only the prices of things which are bought
> with them

Yes, but Council services are also "bought", albeit compulsorily, and
so Council Tax needs to be taken into account even for non-pensioners.

Also, presumably, the cost of "normal" stuff is taken to be the cash
price the buyer pays, and therefore automatically takes in VAT.

> - and that's often hard to judge if there is no market, e.g. is
> more spending on the NHS indicative of inflation in health costs or the
> purchase of more health care?

Again, it's indicative of a hole being created in people's disposable
income, because they can't opt out of paying for the increased spending,
whether it's as a result of more care or more expensive care.  I guess
it boils down to weighting.  It's all very well to have a huge vector
of inflation, detailing inflation for thousands of different things,
a loaf of bread, a pint of beer, a pound of mutton, a one mile taxi
ride, etc, but nobody eats mutton any more (it's all lamb now), and
we shun beer and taxis for apple juice and pushbikes (well, it *could*
happen), and if we take two ski-ing holidays per annum now instead of
just a half ten years ago, then the weighting of the skiing holiday in
the overall scheme of things needs to be amended accordingly, when you
work out a notional modulus of the vector.  Likewise oter things need
to be dealt with, if there are fewer smokers, for example, we need to
down-weight tobacco inflation.