Sunday, 11 April 2010

Inflation, or "You can do anything with statistics"

I've always been somewhat cynical about statistics quoted by politicians. You have to really dig into the details to understand what is really behind the figures they're using. My pet peeve is inflation. A few years ago, you'll see that they changed the way they expressed it. The RPI (Retail Price Index) was dropped, and they started talking about CPI (Consumer Price Index). Because the CPI excludes changes to the mortgage interest rate, the rate of inflation quoted by politicians immediately dropped by half a percent.

But there is another aspect. Each of these measures uses a "basket" of items and measures changes in the prices of those items. But because there are so many different things you can buy in the shops and online, they just take a couple of items from each sector, and generally ones they think are popular purchases.

In the field I am interested in, which the government includes as "toys", the items they monitor tend to include the kind of common purchases typified by plastic Christmas presents from China and soft toys. Hardly relevant to someone trying to understand inflation in a specific niche market.

Politicians are quoting inflation at around 3% at present. But there have been two big jumps affecting online retailers recently. The first is Royal Mail's annual increase. Although they quote it as an average of 5%, this masks the detail. People watch the price of a first class stamp, but what they may not have spotted is that small packets (i.e. the kind of thing most online retailers post) went up by about 10%, and airmail went up by anything from 5% to 20%, depending on the weight and destination. Ouch !

On top of this, the exchange rate between the pound and euro has taken a really unfavourable turn recently. You'll see what I mean if you take a holiday this summer in the Euro-zone ! For us retailers, this means that prices for goods bought from Europe (or priced in Euros) have increased by about 15% in the last 12 months. Just look for yourself at the increase price of petrol; in March 2009, it was around 90p per litre for unleaded, now most of the petrol stations in my area are selling it for £1.22 per litre. I make that an inflation rate of about 37% (although of course, the politicians don't include the huge increases in fuel duty as part of inflation). So where is their 3% inflation now ?

Sorry if this sounds like a rant (okay, I admit it... it is). But there is some good news. We've just had to increase our Vallejo Model Color prices, from £1.40 to £1.49 for single bottles. That's 6.5%, but it's the first increase in over 2 and a half years. I still couldn't find anyone cheaper online in the UK, so I think we're doing pretty well ! We've made some cost savings in overheads, and I must admit we're making less per bottle for ourselves, but I reckon we've done well to keep the price as low as we have. Hopefully you'll agree, and hopefully this (quite long) post will give you some insight into the price pressures we're under, and the logic we've used.