Today is inflation data day in the UK and the National Statistician is about to make a major change. Firstly there is a confession to a current omission in the CPI or Consumer Prices Index ( one which is especially important in the UK economy) and then the detail. The emphasis is mine.
However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property.
The new headline measure called CPIH is claimed to include owner occupied housing costs but in fact uses the same methodology as used for Imputed Rents. As the renting does not actually happen they have to estimate which as I will come to later has gone badly. The alternative is to measure real costs and prices such as mortgage costs and house prices which not only exist but are understood by most people. So as a critique we start with the simple issue of why use a made up or Imputed concept when you have real prices available?
Sadly the UK Office for National Statistics has become an organisation which does not want debate and instead publishes propaganda or “fake news”. Here is an example.
(CPIH is…) the most comprehensive measure of inflation
As I have explained earlier it omits house prices and mortgage costs which are for many people substantial expenses and whilst I welcome Council Tax being introduced other housing costs are still missed out.
At the Public Meeting to discuss this the statistician John Wood made a powerful case against the change which was to point out why housing was being singled out to be imputed? Here are his words from the Royal Statistical Society online forum.
The CPI is based on acquisition costs, which is not the same as consumption costs for products (such as cars, furniture, electrical goods, jewellery) that are consumed over many years. I asked John Pullinger at the meeting whether ONS was going to apply the rental equivalence principle to such products and the answer was no. He accepted that they should be so treated in principle but ONS was not going to do so for “practical convenience”. So the only product in CPIH that will conform to the consumption principle will be owner occupied housing.
The problem of measurement
I argued when this saga began back in 2012 that the rental series being used was unreliable but was told our official statisticians knew better. What happened next?
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.
There was an announcement that CPIH had been some 0.2% too low but the principle that the football chant “You don’t know what you are doing” applies as that series was abandoned and a new one introduced. Let me switch to the regulator’s view from last month.
This matter was considered at the UK Statistics Authority’s Regulation Committee at its meeting on 16 February 2017.
At that meeting, the Regulation Committee decided not to confer the National Statistics status of CPIH at this point in time. This is because although considerable progress has been made, ONS has not yet fully addressed some of the Requirements in the Assessment Report, particularly related to comparisons with other sources, explanations of the methods of quality assurance and description of the weights used in the calculation of CPIH.
I was contacted and gave evidence arguing for such a decision and just to give you a flavour I pointed out that there had just been announced a £9 billion revision to the Imputed Rental numbers which added to so many others that the series is now in my opinion a complete mess.
Also how is CPIH now the headline inflation measure when it is “not a national statistic”? Demotion was grounds for removing the RPI so why does this not apply to CPIH?
There is a further problem which is that the UK monthly rental series is erratic and would send out very different messages from month to month. Accordingly each month we do not get that month’s data but a stream from the past to “improve” the data. The first issue is that it is not that month’s data as claimed but this has another problem which is that it takes a long time for changes in the economy to show up ( around 3 years). This is two-fold and the opening effort is that rents take time to respond to economic changes in a way that house prices do not. Next the data is smoothed so it takes even longer to pick it up. What could go wrong here?
If we look at the numbers released this morning we would expect our “comprehensive” measure of inflation which now has housing costs or CPIH to push above CPI.
Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.
So CPI was?
The Consumer Prices Index (CPI) 12-month rate was 2.3% in February 2017, compared with 1.8% in January.
Should we be nervous before looking at CPIH? Er no…
The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.3% in February 2017, up from 1.9% in January.
So owner occupied housing costs make no difference at all? Not only is that embarrassing it comes under the banner of Fake News in my opinion. Actually Torsten Bell of the Resolution Foundation made a good point earlier.
So what is the point of the switch other than to claim you are representing something which you are not?! If we think of the period since the early 1990s the argument that there has been little or no inflation from the housing sector is a very bad joke.
Retail Price Index
This has been dropped from the Statistical Bulletin which is very poor from the UK’s statistical bodies as after all being “not a national statistic” has been no barrier to the advancement of CPIH. Here are the numbers.
The all items RPI annual rate is 3.2%, up from 2.6% last month. • The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.5%, up from 2.9% last month.
For all the barrage of abuse it has received if you look at UK house prices it continues in my opinion to provide a better snapshot of the UK situation than CPI or CPIH.
Let me also mention the “improved” version or RPIJ which was pushed for a couple of years by our statisticians as it is now RIP for it. More than a few were led up a garden path which now is on its way to be redacted from history.
Regular readers will be aware that I have been predicting a rise in UK inflation for some time even during the phase when the “deflation nutters” were in full panic mode. Once the oil price stopped falling we were always coming back to this sort of situation and of course there has been the fall in the value of the UK Pound which in my opinion will lead to higher inflation of the order of 1.5%. If we look at today’s producer price numbers with output price rising at an annual rate of 3.7% more of that is on its way, sadly as we now face the fact that real wage growth has ended and will soon be negative even on the official inflation numbers.
Meanwhile as I have given a lot of detail today on the inflation changes let me end with something very prescient from Yes Minister.
Sir Humphrey Appleby: “If local authorities don’t send us the statistics that we ask for, than government figures will be a nonsense.”
James Hacker: “Why?”
Sir Humphrey Appleby: “They will be incomplete.”
James Hacker: “But government figures are a nonsense anyway.”
Bernard Woolley: “I think Sir Humphrey wants to ensure they are a complete nonsense.”
Update 2:45 pm
Someone has a suggestion about why there was such an official rush to include Rental Equivalence in the UK inflation numbers.