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.
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!
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.
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.
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
Here is my interview from yesterday.