The emperor’s newest clothes

inflation

Reports that rents have increased in the last five years throw the accuracy of the inflation rate into doubt

Bermuda Sun columnist Larry Burchall did a nice job recently exposing the Department of Statistics’ ability to create people out of thin air when it produced statistics that showed Bermuda’s population has been increasing for the last five years when all the evidence showed that Bermuda’s population has shrunk.

Finance Minister ET (Bob) Richards conceded the point and has promised it will be revised, apparently to the annoyance of some who thought he should continue to maintain the emperor was fully dressed.

It would be nice to think that this is not the only area where the Department of Statistics gets things wrong.

But an examination of the Consumer Price Index suggests that’s not the case.

The most recent CPI, for November, was released before Christmas. It stated that the annual rate of inflation rose 1.3 percent; in other words, the price of a nominal basket of goods and services were 1.3 percent  higher in November 2013 than they were in November, 2012.

Interestingly, for the first time since December 2012, the Index itself fell between October and November, 2013, meaning the cost of goods was lower. That would have to happen year over year to be defined as deflation, and we’re not there yet, fortunately.

Or are we?

The CPI is made up of a number of different sectors, each of which have different weightings, depending on what proportion of household spending goes on them. Thus, food makes up 14.6 percent of the Index, transport and vehicles makes up 13.9 percent and health and personal care, which has seen dramatic price increases in the last five or six years, makes up just 9.2 percent, which is the reason why, even though this sector increased by seven percent year over year in November, the overall Index only rose by 1.3 percent.

The sector that gets the heaviest weighting is rent, at 32.5 percent of the Index, or almost one-third of nominal household spending. That would seem to be about right. Most tenants in Bermuda have spent around a third of their income on rent.

What’s not right is that the Department of Statistics has reported that rents have been rising annually from 2008 through 2012, and although the trend reversed in 2013, when the rent index stands at 110.7, it has only fallen by a minute 3.6 percent year over year so far.

Here’s the list of increases:

2008 +2.5%
2009 +1.9%
2010 +1.3%
2011 +1.1%
2012 +0.2%

It is true that the vast majority of rents (and mortgages for that matter) do not change from one month to the next, or, very often, from one year to the next. But if you talk to any real estate agent or landlord of any size (or any landlord who has tried to rent an apartment or house since, say, 2009,) and they will tell you that rents have fallen, and often by as much as 25 percent in that time. Even if that affects a small number of properties at any time, it cannot explain an index going up when everyone else says prices are falling.

So how did the Department of Statistics get the idea that rents had increased? It’s a great question. It’s a mystery where the Department gets many of its numbers from (no retailer has yet admitted to submitting data for the Retail Sales index, which also fails to collect information on goods purchased on the Internet and delivered by courier, making that Index completely nebulous, but that’s another story) and it would seem that going to the Island’s leading realtors would have produced a completely different figure.

Does this matter? Yes. Inflation helps to set the tone for salary negotiations. It provides the facts for claims that the cost of living is increasing.

If the rent sector of the Index, given the fact it makes up one-third of the entire index, was falling for the last five years, Bermuda’s inflation figures would have looked different.

While Finance Minister Richards is looking at the population figures, he should take a look at inflation as well.

Related articles

Advertisements
This entry was posted in Economics and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s