Dear Listener

The Government has come up with a novel explanation about why the CPI is a better prices index than the RPI. Pensions Minister Steve Webb and Welfare reform Minister Lord Freud have both told Parliament recently that the CPI takes account of people trading down. In other words instead of measuring the price of a constant set of goods as they rise, it takes account of human behaviour and tracks cheaper alternatives as prices rise. So if Nescafe goes up in value, people trade down and buy a supermarket’s own brand. That is why the CPI shows a lower rise than the RPI. At least, that’s how I read what they said.

Exactly how it does this is a bit of a mystery to me as it seems to be contained in the difference between the arithmetic and the geometric mean. Arithmetic mean is easy – it is what most people think of as the ‘average’. The sum of a set of values divided by the number of values in the set. So to find the average of 3 and 5 and 19 you add them up and divide by three which equals 9. The geometric mean is defined as…well, it’s quite long so look it up. But suffice it to say that the geometric mean of 3 and 5 and 19 is 6.580844. Certainly that difference between geometric and arithmetic mean is the ‘formula effect’ which leads to CPI being about 0.75 percentage points below RPI given the same data. But how that fits in with our choice of coffee….well, I am investigating this mystery and will report back another time as it is now very late in the day….

***IN MONEY BOX THIS WEEK***

Japan – what effect will the unfolding tragedy have on the world economy? And the way we produce energy?

New and exclusive figures about student loans reveal just how much some people owe under the current system – never mind the amount they could owe in the future. The top 20 outstanding loans add up to more than £1million.

We explain – or try to – the complex system in place to buy 2012 Olympics tickets and how it could leave you with unexpected overdraft fees – or no tickets at all. Or both.

And our young reporter Ben Carter gets some advice: is he better to put money into a pension – tax free on the way in – or an ISA – tax free on the way out? And is it advice he will take?

That is our current agenda for Money Box, live on Radio 4 on Saturday just after noon. The repeat is on Sunday at 9pm and you can of course listen any time via the podcast page www.bbc.co.uk/podcasts/series/moneybox. Check out our website www.bbc.co.uk/moneybox to follow links, download transcripts, send us stories or ideas you want us to look into and Have Your Say on the Hutton pension reform plans.

This newsletter is available at bbc.co.uk/moneybox/newsletter around the time it hits your inbox (tell your friends who don’t subscribe) and you can join more than 4000 others who enjoy my random but timely thoughts on money 24 hours a day at twitter.com/paullewismoney.

Wednesday is Budget Day – George Osborne’s first spring Budget. Money Box Live at 3pm will be on mortgages – though we might get a Budget mention in it. But the big Budget event is Thursday when Vincent Duggleby and I will be here at midday to take your questions on what the Budget really means for your money.

Best wishes,

Paul

e-mail Paul Lewis