Joe Public's basic understanding of economics

[Dorcus]

A startling poll by Survation was published today. It attempted to guage the general public's understanding of inflation.

Question One asked
"If a loaf of bread is £1 today and the annual rate of inflation is 5%, how much will the new price of the loaf be?"

Only 29% correctly identified £1.05!!!

Question Two asked
"If the rate of inflation halves in the coming year, does that mean...
A) Food prices will decrease
B) Food prices will stay the same
C) Food prices will increase by less

Only 23% picked the correct answer C.

At least this should be an argument for no more referenda to decide our futures please.

[JamesWales]

Re: Joe Public's basic understanding of economics

A startling poll by Survation was published today. It attempted to guage the general public's understanding of inflation.

Question One asked
"If a loaf of bread is £1 today and the annual rate of inflation is 5%, how much will the new price of the loaf be?"

Only 29% correctly identified £1.05!!!

Question Two asked
"If the rate of inflation halves in the coming year, does that mean...
A) Food prices will decrease
B) Food prices will stay the same
C) Food prices will increase by less

Only 23% picked the correct answer C.

At least this should be an argument for no more referenda to decide our futures please.

You would get the same response on nearly every question, unfortunately.

You are at risk of arguing for a technicratic totalitarian government mind. If you don't think people can be trusted on referenda, why do you trust them on general elections etc?

[Taunton Blue Genie]

Re: Joe Public's basic understanding of economics

106% of the electorate consider themselves to be numerate.

[Wash DC Blue]

Re: Joe Public's basic understanding of economics

A startling poll by Survation was published today. It attempted to guage the general public's understanding of inflation.

Question One asked
"If a loaf of bread is £1 today and the annual rate of inflation is 5%, how much will the new price of the loaf be?"

Only 29% correctly identified £1.05!!!

Question Two asked
"If the rate of inflation halves in the coming year, does that mean...
A) Food prices will decrease
B) Food prices will stay the same
C) Food prices will increase by less

Only 23% picked the correct answer C.

At least this should be an argument for no more referenda to decide our futures please.

It would be interesting to see the age/generational breakdown of incorrect answers.

[the other bob wilson]

Re: Joe Public's basic understanding of economics

Maybe I was missing something, but it seems to me that it’s only in recent years that the nature of inflation has been explained fully in the media. While it’s common sense to see that a lower rate of inflation means prices rising at a slower rate, the impression given for years was that a fall from, say, five per cent inflation to four percent meant that prices were going down.

[Keyser Soze]

Re: Joe Public's basic understanding of economics

That is because for many years inflation was falling Bob. There was nothing to worry about. The mandate of the Bank of England was to keep inflation at 2% or below, and it succeeded in doing so.

Now that inflation has broken 2% and keeps motoring higher it is now a problem. Initially it was deemed to be "transitory" but that was clearly rubbish. Now that the central bankers can see it is not "transitory", interest rates are moving up to end the problem. This causes pain in the economy and it has to be explained.

Inflation is a monetary phenomenon and therefore requires monetary policy to fix it. The cure historically is to keep interest rates 1-2% above inflation (this is monetary economics theory and backed by data), as this maintains the value of money, confidence in the currency, and hence confidence of external investors to invest in the country / currency.

What we know from history, is that whatever the pain, if a central bank is not aggressive enough, and quick enough, in getting rates above inflation, then inflation becomes stuck in the system and is much harder to remove. Workers demand more pay rises as they anticipate further prices rises, and then companies increase their prices to compensate for it. This causes a wage-price spiral, and higher prices drive inflation even higher, creating a doom loop. See the 1970s and 1980s for evidence of this.

So where I agree with the BoE and Hunt is that they need to get inflation down quickly. But words will not do it - only action will. Those interest rates must be 1-2% above inflation to start taking effect. Until then, expect inflation to keep ripping upwards.

[Dorcus]

Re: Joe Public's basic understanding of economics

You would get the same response on nearly every question, unfortunately.

You are at risk of arguing for a technicratic totalitarian government mind. If you don't think people can be trusted on referenda, why do you trust them on general elections etc?

Who says I do?

[Dorcus]

Re: Joe Public's basic understanding of economics

106% of the electorate consider themselves to be numerate.

That's inflation for you 😂

[Wales-Bales]

Re: Joe Public's basic understanding of economics

Lardy & Cyril taking part in the poll has obviously skewed the results.

[the other bob wilson]

Re: Joe Public's basic understanding of economics

That is because for many years inflation was falling Bob. There was nothing to worry about. The mandate of the Bank of England was to keep inflation at 2% or below, and it succeeded in doing so.

Now that inflation has broken 2% and keeps motoring higher it is now a problem. Initially it was deemed to be "transitory" but that was clearly rubbish. Now that the central bankers can see it is not "transitory", interest rates are moving up to end the problem. This causes pain in the economy and it has to be explained.

Inflation is a monetary phenomenon and therefore requires monetary policy to fix it. The cure historically is to keep interest rates 1-2% above inflation (this is monetary economics theory and backed by data), as this maintains the value of money, confidence in the currency, and hence confidence of external investors to invest in the country / currency.

What we know from history, is that whatever the pain, if a central bank is not aggressive enough, and quick enough, in getting rates above inflation, then inflation becomes stuck in the system and is much harder to remove. Workers demand more pay rises as they anticipate further prices rises, and then companies increase their prices to compensate for it. This causes a wage-price spiral, and higher prices drive inflation even higher, creating a doom loop. See the 1970s and 1980s for evidence of this.

So where I agree with the BoE and Hunt is that they need to get inflation down quickly. But words will not do it - only action will. Those interest rates must be 1-2% above inflation to start taking effect. Until then, expect inflation to keep ripping upwards.

Thanks for that, but one thing I would say is that I can remember the seventies (when pay rises of over thirty per cent were fairly common) and eighties and I can’t remember inflation being properly explained back then - maybe I wasn’t paying as much attention to it as I do now?

[Keyser Soze]

Re: Joe Public's basic understanding of economics

Thanks for that, but one thing I would say is that I can remember the seventies (when pay rises of over thirty per cent were fairly common) and eighties and I can’t remember inflation being properly explained back then - maybe I wasn’t paying as much attention to it as I do now?

Perhaps the wider media coverage and 24/7 capacity of news means more can be explained? Not sure. Also, more people educated means more people can explain it and more are receptive to it? Again, I only guess.

One bit I didn't answer was you said if inflation was 5% and 4% this year that means things are getting cheaper. What it means is that prices went up 5% last year, and only went up 4% this year. That is, if the figure is positive, it shows how much prices have risen that year.

In order for prices to fall (deflation), the inflation figures need to be negative.

In the example you gave (inflation 5% last year and 4% this year), that is called "disinflation". Which means the prices went up this year slightly less than last year.

I hope that helps.

But if you want to begin to see how ridiculous some inflation methods are (Core CPI, CPI, RPI. RPI-X) have a dig into a useful economics link:

https://www.economicshelp.org/blog/2587/inflation/difference-between-cpi-and-core-

https://www.economicshelp.org/blog/1338/inflation/difference-between-rpi-rpix-and-cpi/

Economists will justify their approaches from a theory perspective. But practically, think about your own spending patterns and you will see that some are ridiculous. Some methods exclude rents, mortgage costs and the like. With rents and mortgages being the biggest outgoing, such methods are insane and worthless, but justified by some academics who clearly live in a theoretical bubble. Other inflation calculations assume things like "substitution effects", where if the price of chicken goes up you will switch to pork to it takes a lower number, which is cheaper. Clearly that would not work for an increasing muslim population and is therefore impractical, but may hold true in Japan, where a muslim population is negligible. Another method (Core CPI) strips out energy and food prices, although this is clearly not useful in the last two years.

In my view the RPI figure best reflects a practical average. Recent governments in the US and UK prefer Core CPI as it is lower, and allows them to pay out less in government debt. I think the higher RPI better reflects the reality of people's monthly and annual costs.

As you dig in and read, you will no doubt form your own conclusions and indeed you should. Don't take these figures at face value. With your inquisitive mind, I think you will find your own absurd findings in how they calculate these things and how it affects you.

[Wales-Bales]

Re: Joe Public's basic understanding of economics

Thanks for that, but one thing I would say is that I can remember the seventies (when pay rises of over thirty per cent were fairly common) and eighties and I can’t remember inflation being properly explained back then - maybe I wasn’t paying as much attention to it as I do now?

I follow people like Richard Murphy on Twitter for an alternative view of things, as a lot of the the media are government mouthpieces selling an agenda.

[Doucas]

Re: Joe Public's basic understanding of economics

A startling poll by Survation was published today. It attempted to guage the general public's understanding of inflation.

Question One asked
"If a loaf of bread is £1 today and the annual rate of inflation is 5%, how much will the new price of the loaf be?"

Only 29% correctly identified £1.05!!!

Question Two asked
"If the rate of inflation halves in the coming year, does that mean...
A) Food prices will decrease
B) Food prices will stay the same
C) Food prices will increase by less

Only 23% picked the correct answer C.

At least this should be an argument for no more referenda to decide our futures please.

Same with transgender people and immigration. One poll in the USA thought that 20% of people were transgender. I think it's more like 0.2%?

Same with immigration levels.

I saw an article before that showed various examples that the average Britain is basically wrong on everything.

That's why we end up with our current government and brexit.

[Dorcus]

Re: Joe Public's basic understanding of economics

Same with transgender people and immigration. One poll in the USA thought that 20% of people were transgender. I think it's more like 0.2%?

Same with immigration levels.

I saw an article before that showed various examples that the average Britain is basically wrong on everything.

That's why we end up with our current government and brexit.

Absolutely correct

[JamesWales]

Re: Joe Public's basic understanding of economics

Thank goodness the Dorcus & Doucas organisation are here to correct everyone.

Given you are berating people for being stupid and then making wild political judgements about it, perhaps you can guess the following, without checking:

1 - Current UK unemployment rate
2 - % increase in NHS budget since 2016
3 - difference between annual immigration and house building in 2022
4 - FTSE change since 2016
5 - wage increases in UK in 2022 vs those in the EU
6 - the number of votes for far-right parties in the UK in the 2019 general election (based on Wikipedia definition)
7 - % increase in minimum wage since 2013

That'll do for now...no checking!!