How the UK establishment tries its best to mis-measure inflation

Today I wish to cover two areas. The first is something which I discussed on TipTV yesterday which is the power of the establishment where my message was that they can be thwarted if you are able to be both intelligent and persistent. The particular subject was inflation and this area was subject to an intervention on the subject of housing inflation by the UK National Statistician John Pullinger later in the day.

Firstly let me set out why this is an important issue. A feature of the credit crunch era was booming asset prices which the inflation targeting regime of the Bank of England missed entirely. It targets a measure called the Consumer Price Index which ignores owner-occupied housing costs. My contention is that with a better measure which includes that hardy perennial of the UK economic environment which is house prices we would have had a least a fighting chance of signalling any future burst of inflation in that area. Also we are in a period of disinflation where some including central bankers have spread a type of deflation paranoia. This would have been very different if we measured consumer inflation properly as the dips into negative inflation would have been avoided.

RPIJ 

Back in 2013 the UK establishment was in a rush to discredit the Retail Price Index or RPI. As part of this it introduced a new variant which as a result of methodological changes would give a lower reading or ” prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI)”.

Therefore, an improved variant of the RPI will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

It was hoped that it would take over from the RPI but yesterday’s announcement told us this.

For the avoidance of doubt, RPIJ would no longer be published.

Is that the shortest lived “improvement” in the history of mankind? This poses all sorts of questions as you see what if they had overrun my protests and succeeded in replacing RPI with RPIJ? There is some 22% of the UK National Debt of the RPI Index Linked variety and many organisations such as National Rail have issued such debt. Also many wage deals are expressed in its terms as well as are many mobile contracts. In addition how are ex Governors and Deputy Governors of the Bank of England going to have a comfortable retirement? You get my point that for what in some cases are ultra long-term issues you cannot bob and weave on a 3 year timescale.

Andrew Baldwin has pointed out at the Royal Statistical Society that RPIJ could easily have been improved and I mean the normal persons definition of improved here not the official one.

Strip the RPIJ of its house depreciation component and replace it with a component for equity payments on mortgages and it has a payments approach to owner-occupied housing.

The issue of Europe

This is a simple one where the UK establishment decided to align inflation measurement with Europe and that led to the introduction of the CPI as an inflation target just over a decade ago. Dr Mark Courtney puts it thus.

All European Union countries have been obliged to publish a national HICP since March 1997.

So a harmonisation with Europe and in this instance Eurostat and in itself there is plainly logic in a consistent measure which can be compared internationally. However in a move of which Mark Carney would be proud the National Statistician John Pullinger has performed a hand brake U-Turn.

I also consider that it is important that we focus on a measure that can continue to be developed to meet the needs of UK users without being constrained by international regulations

Paul Johnson of the Institute of Fiscal Studies got rather upset when I pointed out this inconsistency at his public meeting a year ago. We got this measure to align with Europe and now it is a good idea that we don’t!

Housing Inflation

This is the nub of the issue because you see Europe via Eurostat is introducing a measure of consumer inflation that includes house prices. However the UK establishment wants us to use CPIH which includes rents. Just to be clear using rents for those who rent is correct but using them for owner-occupiers is not and of course gets us in the zone of imputed rents.

Even the UK Statistics Authority warned only last week about the problems of what is called rental equivalence.

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

You might think that not having a reliable rental series was a barrier to using them, well not for our intrepid National Statistician. This will surprise even supporters of the series such as the economics editor of the Financial Times Chris Giles who told me this on Twitter last week.

True, but only once data probs sorted. And they’ve not been.

Perhaps even more damning for Paul Johnson and John Pullinger who both want CPIH to be the main UK inflation measure was this bit.

CPIH is used by almost no one

The UK Statistics Authority put it another way.

There is some disagreement among users about the concepts and methods that ONS uses to measure Owner Occupiers’ Housing costs within the CPIH. ONS needs to do more to explain and articulate its own judgements about the concepts and methods that it uses,

To explain that I have seen statisticians query the numbers used for example in the arena of weighting and get what they and I consider to be unsatisfactory replies. I do not wish to get too bogged own in the detail today but below is a link to my post from the 4th of September 2015 when I explained the flaws in the system.

https://notayesmanseconomics.wordpress.com/2015/09/04/how-you-measure-inflation-in-rents-matters-a-lot-to-those-on-the-living-wage/

If we return to the issue of Imputed Rents then the numbers have been “aligned” in recent times. So we have trouble with the rental price series for both inflation and GDP or Gross Domestic Product.

A New Hope

There was some good news in the release and it relates to something which Jill Leyland of the Royal Statistical Society and John Astin have produced in response to the arguments made there by me amongst others.

Second, I have listened to calls for a measure showing the effect of changes in payments for goods and services, which has been referred to as a ‘Household Inflation Index (HII)’. The HII – as a ‘payments index’ – presents an idea that is fundamentally different in a number of important aspects to the traditional measurement of consumer inflation. These include the potential inclusion of asset prices and interest payments, plus giving each household’s expenditure equal weight.

By asset prices they mean house prices in the main and they are looking to cover what is an ordinary household’s experience of inflation. Accordingly they include mortgage payments and thereby other interest payments to be consistent. Personally I am not too sure about the latter bit and have argued against it but you see no inflation measure is perfect and this in my opinion is the best proposal we have.

Comment

There are quite a few issues here but I wish to return everyone to the fundamental points which are that the last boom and hence the credit crunch and the current deflation paranoia have as factors the way we measure inflation. The UK establishment has consistently headed in the direction of lower numbers or “improvements” and I feel that this is a major reason why people are unhappy with what they are being told. For example the switch from RPI to CPI in 2011 raises economic growth on average by some 0.5% per annum according to Dr.Mark Courtney.

The establishment will always find those willing to do its bidding and I am reminded of Us and Them by Pink Floyd.

Us and Them
And after all we’re only ordinary men
Me, and you
God only knows it’s not what we would choose to do
Forward he cried from the rear
and the front rank died
And the General sat, as the lines on the map
moved from side to side

TipTV

Here is my interview from yesterday.

http://www.tiptv.co.uk/finance/global-economy-didnt-learn-the-japanese-lesson/

 

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17 thoughts on “How the UK establishment tries its best to mis-measure inflation

  1. Great blog, Shaun, and a great TV interview as well. Thank you for quoting me on the RPIJ.
    One thing I ignored was that the CPI follows the ECOICOP commodity classification (i.e. the European classification of individual consumption by purpose) while the RPIJ uses the same commodity classification as the RPI, one especially designed for it by the RPI advisory committees. The UKSA doesn’t want to maintain an index that isn’t based on ECOICOP. Classification debates are the most boring and tedious of all debates, so I certainly wouldn’t argue with that, but surely it is not such a big deal switching the RPIJ to the ECOICOP. Then there is also the issue of giving each household the same weight in calculating the expenditure weights, unlike the current RPIJ. I am not sure this is a desirable change but John Astin and Jill Leyland are attached to it, and so it would seem, is Sir John Pillinger.
    All Sir John says about the HII is: “The HII – as a ‘payments index’ – presents an idea that is fundamentally different in a number of important aspects to the traditional measurement of consumer inflation. These include the POTENTIAL inclusion of asset prices and interest payments, plus giving each household’s expenditure equal weight.” (My emphasis.) If you took the existing CPI, reweighted it giving each household the same weight and tacked on something like the owner-occupied housing component of the RPI ex mortgage interest payments and depreciation series, also calculated giving each household’s expenditure equal weight, this would meet his minimalist definition of an HII, but it would be a terrible cost-of-living index.
    The RPIJ as it is now is arguably the best consumer price series in the world for upratings purposes. Why would anyone jettison an index like this with the vague hope that years down the road it might be replaced by something better? It would make much better sense to preserve it and, step by step, turn it into something better. A move to equal household weights should be the last step in any such process, and certainly not the first.

    • Hi Andrew and thank you.

      You are right to emphasise the potential bit which might be a Sir Humphrey Appleby style swerve although much of the HII is potential as it is currently a concept rather than a reality. As to RPIJ the behaviour of the UK National Statistician has been shameful as it was a concept of the previous holder of the post but is is now to be abandoned. Supporters of it like yourself are right to feel let down by this.

      But the game goes on with so many things we are told are important such as the European harmonisation suddenly abandoned when convenient. After all the Eurostat version of CPIH uses house prices and has to be calculated by the UK albeit that it may be only you and I who follow it closely! So there is no need for the hopeless version of CPIH including rents they have forced upon us.

  2. ‘Strip the RPIJ of its house depreciation component and replace it with a component for equity payments on mortgages and it has a payments approach to owner-occupied housing.’

    I can’t believe you even have to make this point in 2015 and yet here we are,in this obscure part of the interweb,discussing this issue-no offence Shaun.

    The blind leading the blind.

  3. ‘Just to be clear using rents for those who rent is correct but using them for owner-occupiers is not and of course gets us in the zone of imputed rents.’

    Second rule of fight club,don’t mention imputed rents.

    ‘You might think that not having a reliable rental series was a barrier to using them, well not for our intrepid National Statistician.’
    Never let the truth get in the way of a tractor production debate.

    • Hi Dutch

      No offence taken as I explained on TipTV I have been pleased that I am getting an impact in various areas ( RPI continuing, HII today, intervention of the UK Statistics Authority last week and so on..). But one is going to be blocked out on others as for example I plainly should have been in the FT on inflation measurement but when you mostly have the opposite views to the economics editor well ….. But newer ventures such as Share radio have given me a different platform and I did an interview for them at lunchtime on the ECB.

      As to the Imputed Rent issue I have just added a bit to the post which I rarely do. I wanted to emphasise that is their knowledge of actual rents was imperfect their knowledge of imputed rents is on even weaker ground.

  4. Hi Shaun
    Well done with the TV interview, if
    only it was Panorama on the Beeb!

    If I may say so, you seem to agree
    with those of us who have been saying that
    TPTB will continue with ever more bizarre
    calculations to suit THEIR own agendas, will
    international accuracy ever happen?

    JRH

    • Hi JRH

      Thanks people have suggested to me before that they would like to see me on the BBC Hardtalk programme. Although it can be very variable as I recall Kyle Bass being interviewed by Sarah Montague at the peak of his post Greek fame when everyone wanted to know if he was as clever as he had looked and instead we got a lot of grandstanding from Ms Montague. Then this week it was the fawning may I show your book to the camera your Lordship interview of Mervyn King?!

      I intend to keep trying…

  5. Very good interview Shaun – and a great piece on the indicies shambles.
    The consistently rising blog stats indicate your message is getting through – a million hits can’t be far away. Great stuff. Thanks.

    • Hi Eric

      Thanks. The overall numbers have been rising ( Here, Twitter and I think facebook although I am much newer to it) although of course they miss out the Mindful Money numbers. More important than that the message is singing along to the ” I Get Around” of the Beach Boys.

  6. Shaun,super TV interview.

    Loved it.You explained your position clearly and got your points in quickly.

    Super.Can’t wait to see you speaking up for ordinary people on the BBC

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