How the UK establishment blocks and neuters new inflation measurement ideas

Yesterday lunchtime I went to the Royal Statistical Society to attend a meeting on a new proposed inflation measure. This is to be their response to a paper jointly written by Jill Leyland of the RSS and John Astin who was involved in the construction of CPI at Eurostat. This proposed a new Household Inflation Index which I consider to be an improvement  What Jill and John were aiming at was a new inflation measure which would better reflect the circumstances of the ordinary household than present measures. Before I present more on the proposal let me give a simple reason why. The current official inflation measure in the UK called CPI ( Consumer Prices Index) measures the situation of someone around 66% on the expenditure distribution scale and not 50% so it is quite a difference from either the average or median. If you think that it is potentially misleading then so do I.

The Index of Household Payments

You may be wondering at the name change well Nick Vaughan who used to be at HM Treasury but now is apparently an independent at UK Statistics told us that they had spent as much time discussing this as the principles. I found that rather stunning. However I will draw from the proposal what I think are the meat of the new suggestions.

utilisation of a payments approach to measuring owner-occupier housing costs, and the inclusion of some measurement of the capital cost of housing

Those who follow my work will know that I believe the UK establishment has gone to enormous efforts to avoid this so that it can pump up the housing market and claim that as growth and ignore the fact that much of it is inflation. I made the point in the discussion that this area is the one debated time and time again so let me complete the detail.

These elements include but are not limited to: mortgage interest payments, mortgage protection premiums, minor repairs and maintenance, Stamp Duty land tax, transaction fees, building insurance and ground rent…….. the index should include down payments, mortgage capital repayments and major renovations or extensions.

Also the issue I raised earlier about CPI being unrepresentative on the expenditure scale is addressed below.

application of equal weight to the expenditure of all UK households (household weighted)

Some call this democratic weighting although I am not sure that always helps. But we are switching from those with more expenditure having more influence on the measure. another change is this and if you are wondering where it might be relevant then university tuition fees are a clear example.

measurement of price changes, in principle, at the time that goods and services are paid for, rather than when they are acquired.

There are other changes such as more comprehensive coverage of interest costs such as student loans. I do not think this is perfect as I would look for a net rather than a gross measure ( i.e deduct savings interest ) but overall there is much to support this proposal which is why I do.

How the proposal was nobbled before it even began

Easy they plan to produce it only annually rather than monthly. There were audible gasps at this and a lot of criticism. A very good point was made by Simon Briscoe when it was argued that as it was based on the national accounts CPI should on such grounds only be produced quarterly to match the GDP (Gross Domestic Product) data!

I pointed out that I had been expecting a Sir Humphrey Appleby style nobbling of the scheme and that this was it. I asked why they had wasted taxpayers money and people’s time on a proposal which now was now pretty much pointless? Yet again the UK establishment had operated against a plan to measure housing costs. I told Nick Vaughan that the establishment he represented had brought forward an utter turkey in this area which is CPIH (where H is for housing costs) and if you use Twitter as a measure of acceptance then it was registering 0 mentions on days it was released apart from me. I stated that for something which he was proposing as the new single national measure that was another failure. I have just checked over an hour after its release and the number of mentions is again 0.

There were two other bizarre establishment claims. Incredibly it was claimed that the plan was for one inflation measure so they did not want to produce others. An excellent reply said that in the latest Bank of England Quarterly Report there were 30 different measures in the first 4 pages! Thus mentions of a single measure were pure fantasy.

Next was this claim “people do not know what they spend their money on”. The general consensus was that this was both condescending and wrong.

Today’s data

Let me highlight the principles above from today’s data. Here is our official measure.

The all items CPI annual rate is 0.6%, unchanged from last month.

Now let me show you house prices.

Average house prices in the UK have increased by 8.3% in the year to July 2016 (down from 9.7% in the year to June 2016), continuing the strong growth seen since the end of 2013.

Now look at what the experts picked by the UK establishment have done with this.

The all items CPIH annual rate is 0.9%, unchanged from last month.

This is because they use rents as a measure. I pointed out to the meeting yesterday that when CPIH was proposed I had raised at the RSS the issue that we had no reliable measure of them. This was proven correct when the initial system was abandoned. Also that it was a known fact that they take 3 years to respond to economic changes meaning that if the Bank of England used it and made a policy change then it was much more likely to be wrong than right,especially when we allow for the time policy changes take to work (18/24 months to work fully).

Also look at the gap between our current inflation measure and the previous one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.9%, unchanged from last month

That is not only the fault of the RPI and a difference of 1.3% compares to a change in the inflation target of 0.5%.

What will happen next?

Whilst annual inflation was unchanged there are signs in the system of what the Scorpions called the winds of change.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.6% in the year to August 2016, compared with a rise of 4.1% in the year to July 2016.

That is apparently mostly being driven by the oil price rather than the lower UK Pound although of course the two do combine. So far it is only edging into the next stage.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 0.8% in the year to August 2016, compared with a rise of 0.3% in the year to July 2016.

So as 2016 develops we will see input costs affect output costs and then CPI. Just as a reminder I was expecting a pick-up in the annual rate before we had the lower UK Pound so now we will get the beginnings of a joint effect. Last year the price of crude oil fell overall towards the year-end as we wait to see what it does this year.This will have an economic effect via lower real wages for example.

Comment

If we look at today’s numbers we see that the headline annual rate was unchanged although as I have discussed above there are upwards pressures in the pipeline. The gap between house prices and the inflation rate is glaring and as the Bank of England will give more details on the house price friendly Term Funding Scheme later this week seems a deliberate policy. That is why first time buyers need so much “Help”.

Meanwhile we see a potential advance in UK inflation measurement completely undermined. As was pointed out by John Astin we need more information and not less. Also I noted that quite a few of my points were made by others so it was nice to see the messages getting home. By contrast the official response was poor and included saying yes when they meant no and also waffling away rather than answering questions.

 

 

 

 

 

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30 thoughts on “How the UK establishment blocks and neuters new inflation measurement ideas

  1. Hello Shaun,

    CPI is unfit for purpose – thats why taxes and Gov pensions use RPI

    If I use fuel food and housing I have no problem what so ever in finding inflation at or over 4% for tha past 5 years ! ( with may wages increasing by less than 1% )

    their target achieved with no further worries 🙂

    No wonder we the people do not feel better off – but just like the Brexit vote – who do I vote for for a change? these turkeys aren’t gonna vote for Christmas you know…..

    Forbin,

      • “Under the proposals, firms should aim to meet a 20:1 ratio so the most highly-paid person at the firm can earn no more than 20 times the salary of the lowest-paid worker.”

        I’d state that if the UK MPs and Civil servants were not paid more than 20 times the lowest paid part time worker and have their golden pensions linked to CPI and made contribution only

        only then we’d see a change ……

        Forbin

      • Couldn’t agree more with the problems outlined, but, given that the report states:

        “The UK is one of the most unequal developed countries in the world”, which would of course include a comparison to other EU countries, exactly how did EU membership create this shocking state of affairs or prevent it from being resolved?

        It will be interesting to see how many of these sensible suggestions are implemented by an EU free UK.

        • The EU has passed reams of social regulation without getting on this case. Failure by omission.
          The point is that it’s hatred of establishment, like mine, which proved the dominant motivation for the Brexit vote; the EU being seen, rightly in my view, as the top layer of that misanthropic establishment.

      • “The EU has passed reams of social regulation without getting on this case. Failure by omission.”

        Exactly, whilst the EU passed social legislation attempting to address inequality, the UK establishment did nothing, as you say “failure by omission”, so, which is the most guilty of “failure by omission”? Or should I say failure by apathy or intent. However, I digress, the fact is that this is what the UK has now voted for. The EU policeman will be removed and the UK establishment may then run amok.

        I never thought I’d have to say this, but now feel it incumbent upon me to point out that getting rid of the EU doesn’t get rid of the apathetic/malicious UK establishment.

        If you wanted change you had only to change the UK Government who could have acted immediately and directly with no interference from the EU. If you think there are no better alternatives in the UK (as I do) then you either revolt or stay with the EU policeman protecting you from the worst excesses of your own Government.

        Why should the UK establishment address these issues when it omitted to address them in the past with no obstruction from the EU?? Populism is a very dangerous thing, as emotion clouds logic and clear thinking.

        Your unreasonable hatred of the EU is shining through.

        It is interesting to note the story above your original link where a 37 year old woman was subjected to racist abuse, followed through a Tesco car park in Milton Keynes and then kicked in the stomach resulting in the death of her baby – This is what I am talking about! Check it out – http://www.msn.com/en-gb/news/uknews/man-arrested-after-pregnant-woman-34-loses-baby-in-racist-attack/ar-BBw8uub?li=BBoPWjQ&ocid=spartandhp.

        Now, I wonder which way he voted in the referendum….

        • That there is racism in this country is undoubted; much of it founded upon religion.
          The article does not state that the victims were non-UK EU nationals, so is irrelevant in terms of your argument.
          Furthermore, the way he votes is irrelevant; many people who are deplorable vote in many ways, so what?
          As for changing the UK Govt. we have had Govts of three political hues in the last decade and it has made no difference; a bugbear of mine and if you have read many of my posts, you’ll be aware that I am no British nationalist.
          I despise globalist neo-liberalism in all its forms and view the Brexit vote as a huge victory against it.
          You obviously view everyone who voted for Brexit as unreasonable in one way or another, regardless of my posting my motivations and the motivations of others for doing so, and indeed have posted your disdain of electoral democracy more than once.
          In such circumstances, I think it’s only fair to question which one of us is unreasonable.

      • “The article does not state that the victims were non-UK EU nationals, so is irrelevant in terms of your argument”

        You have clearly misread my post which suggests Brexiteers are racist- against – everyone – who – is – non – English. I state this because every Brexiteer I have overheard or spoken to verbally about Brexit has complained bitterly about immigration and foreigners in general, so the link between Brexit and racism is made. You have linked racism against EU nationals with Brexit, I don’t, racism in Britain is racism against anyone non British. Brexiteers I have spoken to don’t want anyone non British in the UK, they don’t discriminate between EU nationals and other foreign countries.

        In any event the positioning of the article speaks volumes, the editor clearly thought there was a link between the attack and the Brexit referendum otherwise why place them next to each other?!!

        Re “You obviously view everyone who voted for Brexit as unreasonable in one way or another” and “…and indeed have posted your disdain of electoral democracy more than once.
        In such circumstances, I think it’s only fair to question which one of us is unreasonable.”

        Regards my previous posts of disdain for democracy please show me . In the meantime I will show you this- https://notayesmanseconomics.wordpress.com/2016/09/09/the-uk-trade-picture-is-murky-but-the-deficits-continue-to-mount/#comments:

        ” ..Unless May intends to call another referendum (which I would disagree with as the UK has spoken and now it must live with it’s decision) further down the line.”

        That’s me talking and sounds like someone whom believes in the democratic process.

        Do try reading my posts.

        You have failed to explain how Brexit will magically change the skewed UK income and wealth distribution as nothing was stopping the UK Establishment changing this pre Brexit over the last 41 years, although you originally said this was one of the reasons you support Brexit. Indeed you make a tacit admission that Brexit is futile where you say UK Government of 3 different political hues have made no difference (presumably you mean to the inequitable income distribution as this is what I was talking about). I note you are unable to make any defence of your unreasonable hatred of the EU once it is demonstrated to you that the UK is equally guilty of allowing a skewed wealth and income distribution. In my view the responsibility lies with the relevant country to tackle such issues primarily, rather than wait for a greater authority to step in, whereupon you would of course criticise the EU for having “interfered” with the UK democratic process in allowing a distorted wealth and income curve.

        You have stated your motivations this time for Brexit support are a dislike of what you see as a misanthropic EU yet are deafeningly silent on the European Convention of Human Rights, which forced the UK Government to draw up the Human Rights Act, extending protections to minorities against a chorus of outrage from the many UK misanthropes complaining that the EU had interfered with UK sovereignty again, when all that happened was that human rights and protections were extended.

        You hide behind the claim that Democracy is fair, well, the news is that Democracy is fair to the majority in the UK but not to the minorities

        I have to question your true motivations as I look through your previous posts to which you have alluded – https://notayesmanseconomics.wordpress.com/2016/06/24/the-economic-consequences-of-the-brexit-vote/#comments

        “For myself, I don’t fear immigration, my fear is multiculturalism.
        It hasn’t worked anywhere in the World without the prior deconstruction of the indigenous culture.
        We would be considered racist bigots by the PC-pseudo-liberal-crypto-fascists to ask immigrants to assimilate”.

        That you expect all immigrants to adopt their host country’s culture to the complete subjugation of their own, rather than take on some aspects of it, whilst the indigenous population look at the immigrant culture with open minds, adopting those parts they find attractive is breathtakingly arrogant. Moreover, throughout history, indigenous cultures have only been destroyed due to arrogant intolerance of the sort you display which has only succeeded when the indigenous population has become outnumbered by the latest arrived population. That’s a feature of democracy, don’t look now but you have just inadvertently criticised the democracy you claim to hold so dear, in fact, you hold it so dear that you wish to subvert it by manipulating the population of the UK to prevent a majority of foreigners arriving in the UK and thence changing UK culture.

        Your whole view of immigration and it’s (what you consider to be) negative effects on the native culture demonstrates a startling cynicism. You obviously have no faith that this time foreigners may be happy to live alongside the native culture and are not prepared to give such a possible situation a chance

        You have questioned which of us is unreasonable and I agree that question needs to be asked and answered after consulting the evidence.

        Returning to the 24th June post referred to above, my reply on that occasion to you started with a quote directly from you:

        ““…my fear is multiculturalism.” –

        https://en.wikipedia.org/wiki/Racism – “While race and ethnicity are considered to be separate in contemporary social science, the two terms have a long history of equivalence in popular usage and older social science literature. “Ethnicity” is often used in a sense close to one traditionally attributed to “race”: the division of human groups based on qualities assumed to be essential or innate to the group (e.g. shared ancestry or shared behavior).” AND

        https://en.wikipedia.org/wiki/Ethnic_group – “Membership of an ethnic group tends to be defined by a shared cultural heritage,…”

        I rest my case……. ”

        As I do indeed despise racists of any colour, race or ethnicity and if you wish to interpret that as being unreasonable then be my guest, you will further confirm your own unreasonableness, you will understand that this is my last communication with you, as I do not associate with arrogant, bigoted racists and no, there is nothing “pseudo liberal” or “crypto facist” about me, although I see extreme similarities between you and facism – “radical authoritarian nationalism”. In your case in the sense of the UK, not England, but if you had your way would be purely Scotland, in relation to which I am sure you will join others in demanding another Scottish referendum, citing the fact most Scottish voted to remain and will then conveniently change if you obtain devolution demanding Scotland not join the EU in order to get your way at the cost of democracy.

  2. It sounds like a wasted exercise if it was only going to be produced annually. If they had stated this before doing the research it would have saved a lot of time and money. One has to wonder if the ‘annual’ bit was added down the line to keep their masters happy..

  3. One has to face facts here: the measurement of inflation affects benefits, pensions etc and so it is far from a technical statistical exercise. If we had a true measure of inflation (which we should have – however defined) then government spending would be far higher and the gap between inflation and wages would be that much more shocking.

    It’s not difficult to see the reasons behind the waffling.

    • I agree. There is a nexus of people with Treasury Department-Bank of England backgrounds that have been promoting the CPIH (Martin Weale, Paul Johnson, Charlie Bean and Kate Barker are among them). If you are going to use QE to stimulate the economy and that leads to big increases in asset prices, including housing prices, it has adverse budget implications if your index for upratings includes house prices. So from a budgetary perspective, they prefer an index like the CPIH, that excludes house prices, to one like the HII, that would appropriately include them. It is nonsensical to be using the CPI or the CPIH as an index for upratings if you think the best index to use should be a good cost-of-living measure, but they are obviously putting budgetary considerations ahead of anything else, without admitting that this is what they are about..

  4. The Bank of England has included Apple on a list of companies that qualify for its new economic stimulus bond-buying scheme.

    There was a time when state intervention was seen as a bogey man as all Governments were slated as poor predictors of companies and investment – and the BoE is better ?

    or as I posit , this is still state aid and investment ……..

    Forbin

    PS: What could go wrong ?
    PPS: who do I vote for to stop this madness?

    • I wonder if the BoE buying company bonds is illegal under EU State Aid rules (giving support to a company that is not made available to all its competitors – including those in other EU countries – thereby distorting the market with tax-payer funds). The ECB, on the other hand, is not breaking the law because EU institutions are not bound by State Aid rules.

  5. That measures like this are deliberately excluded on the grounds of accuracy, (i.e. they might improve it) gives the lie to the widely held belief that these are incompetents.
    They are not, they are liars, they are following an agenda which, for whatever reason/s they dare not announce, and are part of the globalist establishment’s war against the masses.

    FORBIN: vote Trump, vote PODEMOS, vote Left Bloc, vote SNP, most of all vote TRUMP.

    Atm left/right struggle has to be abandoned in favour of the overthrow of globalists.

  6. Thank you very much for reporting on this RSS meeting, Shaun. It seems that the Financial Times didn’t bother to report on it at all. Maybe it is not surprising when Chris Giles was on the Consumer Prices Advisory Committee when it endorsed the CPIH.
    The UKSA can still decide to publish a Household Inflation Index monthly whatever the RSS recommends, can it not? It is in no way bound by their recommendations. So your blog may still be useful in getting the UKSA to opt for a monthly, not an annual, series.
    The timeliness of publication should be a big issue, as well as its frequency. The first official pilot series that resembled the HII was my own MO2 series, one of the analytical consumer price series for owned accommodation published by Statistics Canada. It was a monthly series, but it was only published on an occasional basis. At one time, it was updated, by me or another researcher, about once a year, but that didn’t last and after an update to August 2000 it didn’t get updated at all. If it had been published every month, concurrently with the official CPI, it might well have replaced the official CPI as the preferred indicator for cost-of-living adjustments. I lobbied for this but never got anywhere.
    We can see the same thing with the OOH(NA) series that the ONS has been publishing since December 2014. Even with a quarterly frequency, if it was published every quarter, concurrently with the CPI and the RPI, the estimates would get a big buzz, especially if the UKSA published a CPIH(NA) series, as it should do. As it is, the OOH(NA) estimates are published with about a two-month lag or worse on the official CPI estimates. The 2016Q2 update was supposed to be released earlier this month, but now won’t be out until September 23. People don’t care much when it does get released as it is old news.

    • Hi Andrew

      I have done my bit to get the message out there ( on here and on statsusernet) but I seem to be on my own as far as I can see. I am sorry I did not make your point about what was done in Canada in this regard but I did mention it to Jill Leyland afterwards who also said she had meant too 😦

      I did mention RPIJ as part of my critique pointing out that it had been presented as the new kid in town to be followed and then dropped faster than South Park can say “It’s Gone”.

      OOH (NA) is apparently struggling in Europe because of the problems with some of the underlying house price data.

  7. Hi Shaun, not point scoring but a genuine question as I follow the series closely, you say the report states RPI all items is unchanged at 1.9% but what I’m looking at says 1.8%,

    This is where I’m looking – http://www.ons.gov.uk/economy/inflationandpriceindices . General heading – “Time series related to Inflation and price indices” sub heading – “RPI All Items: Percentage change over 12 months: Jan 1987=100”

    Would you post the correct link for me please?

    • Noo 2 Economics: Shaun was talking about RPIX, was he not? This is the RPI less mortgage interest, which did increase by 1.9% in August, as in July. The RPI, as you correctly state, increased by 1.8% in August, down from 1.9% in July. There was a greater formula effect in August than in July, so if you adjust for that RPI less mortgage interest went from 1.2% to 1.1%. (This is trying to calculate what the RPIJ series for All items excluding mortgage interest would be, which the ONS should publish, but don’t. And after this year, the ONS doesn’t plan to publish even the RPIJ for all items.

  8. ‘Those who follow my work will know that I believe the UK establishment has gone to enormous efforts to avoid this so that it can pump up the housing market and claim that as growth and ignore the fact that much of it is inflation. ‘

    Yep.

    Utterly scandalous.If the public understood it,they’d be fuming.like all the great scams though,it’s akin to stealing a pound from a million people rather than a million pounds from one person

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