The gap between CPI at 0% and RPI at 1% poses serious questions for UK inflation measurement

Today is inflation day in the UK as we progress through 2015 with a lower level of inflation than we have been used too in the credit crunch era. However there is something stirring in the depths of UK inflation measurement.

The consultation, which will run for three months, will provide all users with the opportunity to express their views on the issues raised by Mr Johnson in his review.

Yes we are getting the opportunity to express our views again and rather like Greece discovered only yesterday and Ireland  discovered before it looks as though we are going to get more and more consultations until we give the “correct” answer. Back in the days of the Retail Price Index (RPI) consultation there was an opportunity for interested parties to cast a vote which led to a landslide in favour of keeping the RPI. I covered this back in January 2013 when I was at Mindful Money.

http://www.mindfulmoney.co.uk/wp/shaun-richards/victory-on-the-uk-retail-price-index-and-it-feels-good/

Sadly even a landslide victory does not deter the establishment as this from the latest consultation from the UK Statistics Authority indicates.

The Authority holds a clear position on the RPI, which it has set out in a range of statements since 2013.  It considers that the methods used to produce the RPI are not consistent with international best practice and, consequently, that the series is not deserving of National Statistics accreditation.

In spite of the fact that it won the consultation, in official terms it lost because that was always the plan! Of course losing National Statistics accreditation may be seen as a badge of honour as sadly it is the National Statistics process which is by now discredited.

I was reminded of this one more time about this yesterday as a public meeting at the Royal Statistical Society (RSS) had general agreement that the RPI is “trusted” in the main. What was not said was the implication that the official CPI measure is not. Indeed the planned new main inflation measure called CPIH (H= Owner Occupied Housing Costs) which the Paul Johnson review recommended only recently has been both an embarrassment and a shambles. It remains without a National Statistics accreditation because even our establishment have so far been unable to put enough lipstick in this particular pig.

Review Inflation

Oh and it would seem that the UK establishment are making sure that they even have a reserve dog in the fight. From the RSS.

Clearly we welcome an independent review which is likely to lead to an improvement in economic statistics.

How independent will Professor Sir Charles Bean be? After all we discovered in his car crash interview with Channel 4 back in September 2010 that he has little respect for savers! Actually the RSS also has its concerns on this front.

The production and governance of UK statistics are independent of government and should continue to be.

I pressed the matter at yesterday’s public meeting as this is outside of the UK infrastructure (ONS, UK Statistics Authority,and National Statistician) and they had no reply other than “it is under advisement”

Still as Professor Bean is an enormous beneficiary from the RPI via his Bank of England pension there is an opportunity for him to revert to being like Mr.Bean one more time should he look to deny it to everyone else.

Today’s data

These rather neatly demonstrate why so much effort is going into a campaign of disinformation and attempted discrediting of the RPI.

The all items CPI annual rate is 0.0%, down from 0.1% in May.
The all items RPI annual rate is 1.0%, unchanged from last month.

They present quite a different picture of the economic world as one is on the edge of giving us yet more “Deflation” headlines whereas the other does not. The official view on RPI also has strong supporters in the media and from the Twitter responses I have just received at the Financial Times in particular. These are from the economics editor Chris Giles.

Please don’t get me started – NEVER LOOK AT RPI – SHOULD’VE BEEN DELETED YEARS AGO

NOT REALLY. IT’S A USELESS MEASURE OF OWNER-OCCUPIED HOUSING BASED ON INTEREST RATES…

Of course he is entitled to his opinion but it misses out the fact that CPI is flawed too and that it ignores a very important sector of the UK economy which is owner occupied house prices. More on this later.

What are the prospects for UK inflation?

If we look deeper into the data we see that June saw continued disinflationary pressure on producer prices.

The factory gate prices (output prices) for goods produced by UK manufacturers fell 1.5% in the year to June 2015, compared with a fall of 1.6% in the year to May 2015.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 12.6% in the year to June 2015, down from a fall of 12.3% in the year to May 2015.

In a nutshell this has mostly been driven by falling oil prices (the sub-section of the output component is -14.2% on a year ago). I note that so far in July we have seen a return to that theme with oil price falling again. In terms of Brent Crude Oil it ended June around US $63 per barrel and is now US $57 so there has been another downwards push.

Should this continue we may see another zero reading for July but for a negative one we would need a solid push as on a monthly basis UK CPI fell by 0.3% last year meaning there is a largish hurdle to vault.

A Promised Bank Rate Increase

Bank of England Governor Mark Carney has been taking the opportunity of a 0% official inflation reading to catch the headlines.

timing of rate hike is moving closer

Is it closer than when he told us this back in June 2014 at Mansion House?

It could happen sooner than markets currently expect.

In terms of old technology he is sounding rather like a scratched record on this subject. Perhaps Bob Dylan was correct.

The answer my friend is blowin’ in the wind

Of Goods and Services Inflation

There is quite a dichotomy and divergence here.

The CPI all goods index annual rate is -2.0%, down from -1.8% last month.
The CPI all services index annual rate is 2.2%, down from 2.3% last month.

Like a game of two halves isn’t it?

Comment

The picture is changing but some things remain the same as we observe the UK establishment deploying ever more resources ( Dames, Professors, Sirs) in its efforts to improve as in see lower numbers recorded for UK inflation. I would return to the open meeting at the RSS yesterday where the supposedly discredited RPI was described as “trusted” with no dissenters apparent. Perhaps that is another reason why they want to get rid of it!

There is some hope as John Astin and Jill Leyland presented a paper yesterday on a new Household Inflation Index. I particularly approve of the fact that it plans to cover the issue of UK housing costs throughly.

We therefore propose that all elements of owner-occupier expenditures  – deposits and outright payments, mortgage payments (both interest and capital), mortgage protection premiums, spending on renovations and extensions, repairs and maintenance, stamp duty land tax, legal surveyor and estate agents fees, insurance of dwellings – should potentially be considered in scope.

That’s the spirit! Also I note that they do not share the view expressed by Chris Giles on mortgage interest-rates shown above.

Also some of my views on inflation were expressed here in a video interview with Kumutha Ramanathan of World Finance.

https://www.youtube.com/watch?v=urLzqKQVgR4&feature=youtu.be

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27 thoughts on “The gap between CPI at 0% and RPI at 1% poses serious questions for UK inflation measurement

  1. Excellent article and good to see you are still pushing hard RPI and decent housing cost statistics.

    Manipulating inflation does matter as growth due to economic expansion compared with inflation with a 1% annual error will be 22% out for each generation of 20 years. This will also mean that the purchasing power for benefits and pensions will steadily drop!

    • “…This will also mean that the purchasing power for benefits and pensions will steadily drop!”

      Bingo !!

      Forbin

    • Hi Rods

      The switch from RPI to CPI in the relevant sections of the GDP deflator (18% making the CPI ~24%) have raised UK GDP by an average of 0.5% per annum according to Dr. Mark Courtney. It’s magic isn’t it?!

  2. Hi Shaun

    I’m sure you would agree that the disinflation brought on by the oil price drop should fall out of the index late 2015/ early 2016 and then we will be back to business as usual, that is inflation.

    I am sure you are right in your implied assertion that these numbers are manipulated in some way to give an advantageous answer to the inflation question, the same way that in the 1980s the unemployment data was continually revised to keep a lid on the actual level of unemployment.

    I am 70 and when I was younger I trusted official sources implicitly; the older I get the less I trust anything; is it me being too ingenuous in the past or is the manipulation of data getting more and more egregious? I confess to being ingenuous but I think the manipulation of data is getting more and more common to hide unpleasant facts.

    • actually perhaps it just that

      1, Goodhart’s law is named after the economist who originated it, Charles Goodhart. Its most popular formulation is: “When a measure becomes a target, it ceases to be a good measure.”

      2, little lies lead to big lies / The most mischievous liars are those who keep on the verge of truth. / Lies are a little fortress; inside them you can feel safe and powerful.

      the unpleasant facts are that most Western governments are broke , have been deceived by the Big Major Banks, are slaves to the Rich 0.1% ( who have become untouchables due to mis-management of Globalization ) and that if they came out an told the truth they fear they will never be elected again

      so why bother to tell the truth ? the public are well fed and entertained , the MSM are no longer a threat if not outright “controlled”

      but mostly to get any “growth ” in the economy the Government have had to resort to all sorts of deceptions to Gerry Mander results higher .

      Economics as taught do not have to obey the laws of physics , as such they do not conform the reality that the economy works in a physical universe thats governed by these laws (!) .

      Resources + energy = work + goods = heat + waste ( landfill ** )

      ** As I often say to my daughter “going to Mall to buy some more landfill, then ? ”
      Resources + energy are finite because the planet is .

      Is oil at 57$ a barrel cheap ? cheaper maybe than 147$ but more that twice 2001 level , then look at gas and electricity ( coal )

      so just get a bag of popcorn and settle on the sofa , those in charge can’t see past tomorrows headline and doomed to repeat history

      Forbin

      • “Resources + energy are finite because the planet is .”

        A common mistake people make. Energy can be considered infinite, where the sun has about 4 billion more years of life. Sunlight produces enough energy to power all of mankind’s needs. So far mankind has harvested trees, coal, oil and gas as convenient forms of past sun energy with the latter being the most useful forms and energy densities. So far with renewables the vast majority of output has to be used immediately, but this is going to have to change, so the excesses are stored, so we can then harvest it when sunlight and wind instant output falls short. The key is going to be efficiency for doing this and therefore overall instant plus harvested price.

        If combine several element together of planet molecules to make a useful chemical compound, the molecules still exist. The key in the future is going to be recycling, so things that we have tuned into useful forms we can turn back or make into another. This is going to become a major 21st century industry and eventually we are going to have to pay complete lifecycle costs not just raw materials, manufacturing and distribution for consumer items. At the moment our dig out of the ground in commercial densities useful materials, disperse them across the planet as devices useful to mankind and then bury them again in uneconomic densities as landfill is obviously not a smart thing to do and will over time, through necessity, have to change.

        • yes I forgot to say fossil fuels are finite but then then again so it solar or wind in effect as if you took too much wind power then you will change weather patterns

          there is always a cost / benefit to take into account

          and one other caveat – population has to stop growing as well

          forbin

    • Hi Noo2

      it got a fair bit of implied support yesterday from the attendees at the Public Meeting so the wheels are turning. The establishment and their media apologists are getting more and more isolated.

  3. Hi Shaun
    The inflation stats story is one of many that is on-going in the relentless drive to remove any link with ‘official’ and ‘real’. Quite soon the only ‘reality’ will be what we told it is.
    Depressing how the power of computing/technology has been to roll back the power of the individual rather than increase it as was originally hoped ( or should that be ‘dreamt) to be the case.
    A late comment on the Greek situation. It is an unfortunate fact that not one €uro has been repaid by the Greek nation over the last 6/7 years to offset the Billions of loans etc. Not one. I can’t make up my mind whether the ‘average hector’ has enjoyed the fruits of the good years 2000-2008 more than the suffering of 2008-2015 and shouldn’t really complain that eventually the something for nothing period has to end. Or whether he has been completely ripped off by his own succesive governments. The general EZ-bashing commentary of the UK media doesn’t really help understand the dynamics at play.

    • JW , my suspicions are that the Greeks and Greece are part of a master “plan” ( or is that serendipity ?) to lever in more fiscal union with the EU fortress

      The kan will be kicked until the end of August then the announcement will be made that only full fiscal and tax unions of the member states will avoid all this heartache and unpleasantness

      Thus the Empire was forged !

      Forbin

  4. Thank you for attending the RSS meeting yesterday. I am sorry that I couldn’t be there but I did drink a Bass ale on an outdoor patio in Ottawa at noon in honour of you and the other participants. You asked how neutral Charlie Bean could be in reviewing the UK statistics program. At least on the issue of the treatment of owner-occupied housing (OOH) in the target inflation of a central bank, he isn’t neutral at all. He is openly hostile to Eurostat’s proposal for a net acquisitions approach. To see this, you only have to look at a speech he made in March 2010:
    http://www.bis.org/review/r100318e.pdf
    He asks: “Would it have helped if our target variable had, say, included a measure of asset prices, particularly house prices?” By framing the issue in this way, he implies that, if you open up the inflation indicator to include house prices, maybe you should include farm land, financial assets and so forth, although few proponents of a net acquisitions approach to OOH would ever suggest any such thing. Also, he suggests that assets aren’t already in the target indicator, which is clearly false. Furniture, home appliances and motor vehicles are already included, and these are collateral against a loan in the same way that residential property is.
    He goes on to argue, unconvincingly, that if housing prices had been in the target indicator of the Bank of England, it would have made no big difference in the Great Recession. However, the Great Recession was special in that it involved housing booms and busts in many different countries, none of which had house prices in the inflation measure monitored by the central bank. It is really hard to believe that if the US Fed, the Bank of England, the ECB and the National Bank of Ukraine had all been targeting inflation measures that gave a healthy weight to housing price changes in the nought decade that the British or world economy would have suffered as much as it did. In fact, the G-7 country that did the best in the recession was Canada, the only country whose central bank includes housing prices in its target indicator. (Based on Mark Carney’s current rhetoric, an uninformed observer would never guess it.)
    He concludes: “Finally, there is something of a logical error in moving from the indubitably correct observation that successful inflation targeting is insufficient to guarantee either macroeconomic stability or financial stability to the conclusion that monetary policy should in addition, or instead, be focussed on some other objective. There is a real danger in overburdening monetary policy if it is expected to achieve both price stability and financial stability simultaneously.” Mr. Bean’s the one who is making the logical error, not the advocates of a net acquisitions approach to OOH. There is really no case for excluding OOH from a central bank’s inflation indicator, as Eurostat recognized from the beginning when it developed the HICPs. Durable goods and housing can be priced based on acquisitions, payments or use. Eurostat has excellent reasons for favouring an approach based on acquisitions, which is what is already done for durable goods. Mr. Bean engaged in pure sophistry in suggesting that if one added an OOH component based on net acquisitions approach to the CPI one would be creating some kind of a monstrous hybrid between an inflation measure and something else. It is absolutely the logical complement to the existing CPI. It is the current CPIH series that is a monstrous hybrid of a proxy series for OOH costs with a CPI series that forbids the use of proxies.

    • Hi Andrew

      Charlie Bean did not have a good 2010 did he?! I mean in the intellectual sense as of course he was being paid well and building up his RPI pension.

      On the subject of net acquisitions Ainslie Woods spoke for the ONS and said that one of its objectives was to follow Eurostat rules. To which I pointed out that they were ignoring them by using rental equivalence in CPIH. It is of course not her fault but should Eurostat set rules for CPIH then the Paul Johnson review would be up a creek without a paddle!

  5. Shaun, apologies for returning to the Greek crisis but I have just read a confidential IMF report ( can’t be that confidential!) to heads of European states that says that Greece needs at least a 30yr grace period on servicing all debts, including new loans to be made and dramatic maturity extensions OR fiscal transfers to the Greek budget OR substantial up front haircuts. Finally a report that is credible! In view of the fact that these same countries parliaments need to approve the latest Greek terms, I wonder just how likely approval is? Some of the media are treating the latest ‘deal’ as a done deal. I’m not so sure. The proposed can kicking is so far into the future I hope that they are now using a graphene can reinforced with titanium!

  6. Hi Shaun,
    When Carney is talking of a rate rise being sooner than markets think is this not because he’s looking at wage growth wondering when it will filter through as an inflationary influence(notwithstanding that real wages have fallen approx 13% depending on your inflation measure since 2008)?

    • Hi Noo2

      When Governor Carney spoke today I wondered if he was being influenced by tomorrow’s average earnings numbers which he would have received at 9:30 am today. If we look more deeply than so far 2015 has wages weaker than 2011 for example when the Bank of England did nothing. So we wait for 9:30 am tomorrow with even more anticipation..

      Also there is a counter current which is that such words boost the UK £ with us moving above US $1.56 and touching Euro 1.42.

      I remember Forbin making the point a while ago that they might raise Bank Rate when the ordinary person sees better wage growth.

  7. Hi Shaun,

    Since 1997 the UK has created both RPI and CPI. So you might think a responsible adjudicator would run interest rate setting rules using both indexes and plot how they might have varied interest rates. Use this data to model the economy for comparison. Scientifically report on pros and cons of both.

    As I’ve previously posted – in the decade since 1997 RPI signalled higher inflation due to a house price boom. I suggest that using RPI would mean
    1 ) higher base rates pre-2008
    2 ) probably lower housing debt, less bank exposure and greater house affordability.

    But sadly we just get a bunch of self proclaimed “wise people” telling us that CPI is the only option – without any facts to back up their claims.

    • Hi ExpatInBG

      There were quite a few CPI “experts” around on twitter today but they were missing from the RSS meeting yesterday as I pointed out to them. Chris Giles came to the RSS in the past when he was a member of the CPAC committee ( during which time it came to the wrong conclusions on CPIH and RPI) and tried to attack RPI then but he lost quite a bit of credibility when he tried to argue that a landslide vote in favour was a defeat.

      Establishment views and voice don’t like democracy much do they?

  8. Hi Shaun, I think that Carney’s proclamations are simply another case of FG -forward gullibility. Having forecast a Greek deal in the end I’ve been proved right. But just as I read the terms of siad deal I am now sure that there will be a parting between DE and GC by the end of the week, whilst Hollande and Renzi rubber neck at the train wreck they’ve facilitated. Returning to today’s theme there won’t be rate rises in the UK there will be QE pumping…to deal with the strenghth of sterling. Just my 2 penneth worth. 😉

    • Hi Paul C

      I incline towards that view on the Bank of England still as well. They think that promises are enough as even the 2 hawks have not yet voted for a rise since changing their minds on the subject.

  9. Shaun, there is no reason really to continue to support the RPI. It is a flawed indicator based on its overreliance on the Carli formula. I make frequent reference to the RPI myself, but that’s only because there is no detail provided for the much better RPIJ series. A person would have to be a fool to think that the CPI offers a serious alternative to the RPIJ as an uprating index, but they would also have to be a fool to think that the RPI, with a formula effect of from 0.5 to 0.7 percentage points, is a better uprating index than the RPIJ. The case for the RPIJ is made in my paper: “Common Sense Favours the Use of the Jevons Formula in Consumer Price Indices”:
    http://www.statsusernet.org.uk/communities/community-home/librarydocuments/viewdocument?DocumentKey=2b38c451-e593-4a41-9f9f-54077e8a9c0ee&tab=librarydocuments&CommunityKey=3fb113ec-7c7f-424c-aad9-ae72f0a40f65
    I am not a total fan of the new RPIJ. In particular, it probably still gives to big a role to the Dutot formula and in many cases the Dutot formula could probably be usefully replaced by the Jevons formula. There are also special cases, where pps sampling based on expenditures generates a Carli index, where it might be used, as long as there is resampling every year, or, more likely, a direct Carli index rather than a chain Carli index is calculated until such time as a new pps sample is drawn.
    The Canadian CPI got rid of the Carli formula in November 1978, with its October 1978 update. No-one’s ever missed it. The Carli formula should never have played such an important role in the RPI for so long. Its role should have been downgraded long ago.
    There are big problems with the UK consumer price indices. The formula now used to calculate seasonal commodities in both the RPIJ and the CPI is just a joke. It should have been replaced long ago. There’s no stamp duty series in the RPIJ. It should be there. So it’s time everyone moved on and said “Ciao” to the RPI, and “Good day” to the RPIJ. Then they can start working on the real problems plaguing UK consumer price indices.

    • Hi Andrew

      I feel that the new Household Inflation Index suggested by Jill Leyland and John Astin has some considerable merit as it provides something of a fresh start. Whilst there are many inflation indices in the UK now the truth is that none of them do the right job. Even worse the UK establishment has pushed the CPI simply because it gives a lower answer.

      It is a shame that geography prevents you from attending the RSS. I would enjoy listening to you and Dr. Courtney debating the formula effect.

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