September 2011 newsletter

Lies, damned lies and statistics! – just how bad are things out there?

A century ago Mark Twain talked about how he was ‘beguiled’ by figures and said there are three kinds of lies: ‘lies, damned lies and’ government ‘statistics’.  I added the government bit. History never fails to repeat itself, albeit under different cloaks.  Does the phrase ‘to err is human, but to make a really big mistake, it takes a computer’ hold some truth when it comes to statistics?  Is it just be a case of ‘put rubbish into a computer and you’ll get rubbish out’, or is there more to it?

I’ve been scratching my head for some months now at the claims that inflation is running at 4.5% to 5.5%, depending on which measure you use.  I recognise that each household experiences a different ‘real’ inflation rate.  I worry that the older members of our society seem to be suffering more than the rest of us on the inflation stakes.  I worry that the goverment may be purposely allowing high inflation because they see it as the only way we’ll ever pay down our debt: I worry about the social consequences of this.  But I did expect that as a ‘normal Joe in the street’, my own experiences would be something close to the official figures.  As what I was seeing was so far removed from the official figures, I started looking at where they come from.  After all, if I am to give best advice to clients, my opinions have to be based, in part, on hard fact of what is really happening today.

We all know the inflation figures come from the Office for National Statistics, a government department.  Their stated mission is ‘to improve understanding of life in the United Kingdom and enable informed decisions through trusted, relevant, and independent statistics and analysis’.  I have to admit that my early views of the reliability of the ONS were a little jaundiced, after all this is the organisation that changes the way it measures key things, such as unemployment, more times than you’d care to remember, with the figures going one way.  In common with the Bank of England (don’t you just love the way they describe things – just why is it so tough for everyone when the economy is ‘softening’?), I worried about the presentation of their work, suspecting their verbage and methodology was heavily influenced by the government.  It’s clear the ONS actually believes it is doing a good job, but with one of the main reasons for the recession being the exerting of excessive influence by highly motivated and politically powerful groups over the politicians and others in positions of power, I was worried they could be providing unreliable data, on which we are all acting – and reliance on bad information must lead to bad decisionmaking.  Unfortunately, my investigations has done little to dismiss my worries.

Looking at the inflation figures, these are obtained by comparing over time the prices of a moving basket of goods.  Let’s put to one side the choice of things they put in the basket.  And the fact that there appear to me to be huge regional variations but there is only one nationally reported inflation figure.  Let’s just look at ‘substitution bias’.  This is where whenever the price of a product goes up by a big figure, it’s removed from the basket, swopped for a similar alternative whose price is increasing slower.  The ONS argue that this is what consumers do, because they notice such a large increase; they are solely price driven; they feel compelled to react to the increase with their feet, rather than just put up with it; and they are physically able to buy the substitute.  But this bears no resemblance to the real world, does it?  How often do you swop one cut of meat that’s gone up in price with another, cheaper, cut?  It seems to me that the ONS figures represent the lowest inflation rate experienced by someone with far better powers of memory and far more time than most of us have.  I’d argue the figures are fudged and the true inflation rate suffered by the vast majority of us is something close to double the official figure.

No wonder your staff are complaining about their pay, no wonder your clients’ putting up of their prices by CPI/RPI doesn’t seem to get them very far.  Whatever strategies you and your clients adopt for surviving (or thriving in) this recession, if you double the official stats in your thought processes, you may be closer to the truth and stand a far better chance of succeeding in your plans, or giving proper advice!

Are we already in a double dip?

This question follows on nicely from the last point.  Have you ever wondered how the figure for UK GDP can be assembled so quickly when the government departments generally operate on a far longer turnaround and seem to forget about the odd billion here and there with gay abandon?  Let’s put to one side the queries I have over accurately pulling together the base ‘turnover’ figures for such a complex entity as the UK economy.  Let’s just assume the people and computers get it right (ignore the comment about computers above!).  How is inflation taken into account, now that it’s becoming a relatively bigger figure?  Any idea?  Do they use CPI or RPI?

No, it’s neither CPI nor RPI!  It’s something called the ‘GDP Deflator’!  It’s (yet) another measure of inflation, used because it’s felt to be more fit for the purpose, here’s a link to the Treasury’s guide.  I find it a struggle to understand how it’s calculated, so let’s just look at how it compares with CPI and RPI. It shouldn’t be too far away, should it?

If you recall, in its preliminary figures circulated a month ago the ONS said that the UK GDP grew by just 0.2% in the second quarter. Several excuses have already been printed over the data for these figures ‘being less extensive than usual’, the diversion of staff to other essential work being just one excuse given, so I guess we can expect this figure to be adjusted down when the final figures are circulated in a few months time!  In the meantime, let’s just go with the 0.2% currently quoted.  I rang the ONS and asked what figure they had used as the GDP deflator in the 2nd quarter’s figures.  Sad, I know.

Eventually got though to someone in the depths of the ONS who could answer my query.  I was told it was 1.8%.  Less than half the reported inflation rate by even the lowest measure.  The 0.2% compares the second quarter of 2011 with the same quarter in 2010. If anything like the real inflation rate was used in the calculations, rather than the GDP Deflator, then we’d already be reporting what the Bank of England quaintly calls ‘negative growth’.

Perhaps I’m not explaining myself best here, in which event here’s a link to an article in Gold News, which gave a similar explanation for the final stats for the first quarter of 2011.  There the writer reduced a reported 1.8% increase for that quarter over the same in 2010 down to just 0.1% because of the GDP deflator effect: and I doubt any government can get their figures to be accurate to 0.1%.  With there being no reliable regional figures, I suspect the West Midlands is suffering more than most.

If as I believe we are already in a double dip, and in the last few days have been told to expect worse to come, what will it mean for your clients and your own business?

No one has all or even most of the answers, we are treading in murky, dangerous waters, made more difficult to walk through because we are being fed unreliable information reported to us as facts.  To promote thought in both my mind and in yours as to how we can help you and your clients get through this, I’ve started a series of articles on my Blog.  Here are links to a few: The ‘it’ in your client’s business; Take time to do the right things; Sell more!.

I hope that you find my newsletter of interest.  Please give me your feedback, good or bad, on what I say or how I say it.

Paul Brindley

Midlands Business Recovery
‘Doing more for Black Country businesses’ 

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Our address is:
Midlands Business Recovery, Alpha House, Tipton Street, Sedgley, DY3 1HE
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‘Doing more for Black Country businesses’
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