Headline UK Inflation or CPIH is an example of official “Alternative News”

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?

Smoothing

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?

Today’s numbers

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.

https://twitter.com/TorstenBell/status/843760157494595584

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.

Comment

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.

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32 thoughts on “Headline UK Inflation or CPIH is an example of official “Alternative News”

  1. To be fair to this “deflation nutter” I was consistent in saying only stagflation awaited as an alternative. I think this is coming to pass now as wages are indeed stagnating as essentials rise. I know it’s very unfashionable to care about those on benefits but their subsistence allownces will increase poverty and inequality very quickly.
    We are not in a good place.

    • It’s an important distinction to any debate as to what we’re actually referring to.

      I’ve long been of the opinion that we’ll see a broad contraction of credit over the course of this depression, whilst at the same time seeing prices rise.I don’t think the two are mutually exclusive.

      In Shaun’s defence,I think he’s referring to ‘deflation’ in terms of prices not money supply/credit/growth

    • Hi Forbin

      Mark Carney was in full cry earlier today. From Bloomberg.

      “The Bank of England has learned the lessons from the sudden resignation of Deputy Governor Charlotte Hogg after she failed to disclose a potential conflict of interest, Governor Mark Carney said.

      “For those who have questioned whether we ‘get it,’ we do,” Carney said at a panel on banking ethics in London on Tuesday. “We were clear upfront that there must be consequences for both her and the bank.””

      Yet he tried to keep her on which means that there are different rules for the establishment from the ordinary person. Yet he is allowed to continue his fantasies.

      ““Repeated episodes of misconduct have called the social license of finance into question,” Carney said. “The scale of these shortcomings is why the Bank of England has been pursuing a series of measures to convert ethical drift into ethical lift.””

  2. These inflation indexes are used to suit TPTB purposes, RPI to increase rail fares and their pensions, CPI to keep benefits and other payments low.
    To ignore most peoples largest expenditure, the roof over their head, is a joke.
    CPIH is not a “national statistic”, but we are going to use it anyway, just sums up their idiocy.

    • ‘These inflation indexes are used to suit TPTB purposes, RPI to increase rail fares and their pensions, CPI to keep benefits and other payments low.
      To ignore most peoples largest expenditure, the roof over their head, is a joke.’

      Beautifully put if I may say.Absolutely bang on.

      The average house goes up £10,000 p.a. which is 40% of the median salary but CPi’s stays at 2%

  3. And there was I thinking only our electricity supply was powered by Wind and Gas ……..

    Seems our inflation indexes are too , mixed with fairy dust ( drugs) and negotiable consent (sex trade) .

    Garbage in = garbage out

    Forbin

    • The ONS CPI Technical Manual on Consumer Price Indices says: “Expenditure on illegal transactions is included in the scope but excluded from the coverage.” Essentially it means that they are excluded, as they don’t even enter into the expenditure weights. Don’t confuse the UK GDP estimates, which do include coke and hookers, with the UK consumer price series, which don’t.

  4. Citizens regularly stage protests against poor political decisions, including financial matters such as spending cuts.

    The ONS and the BoE are supposed to be independent, but their recent decisions increasingly suggest the influence of political expediency.

    Why aren’t people holding protests outside the ONS and the Bank of England?

  5. If only, instead of measuring prices, they measured the inflation of the money supply. It would all be a lot more transparent.

    • Hi Frizzers and welcome to my corner of the web.

      Whilst the narrow measures of money are relatively easy to measure it gets harder when you add in the broader measures as they include loans. You then shift from money supply to money demand so we might then be discussing mistakes in money supply measurement just like I was reading about as a student in the 1980s.

  6. Great blog as always, Shaun, and thanks for mentioning John Wood’s question to the National Statistician at the public meeting. I found John Pullinger’s response very unsatisfactory. A fair amount of expenditures on household appliances by homeowners could be assigned to the equivalent rent category if, rather than trying to adjust rents to exclude costs of appliances rented with a dwelling, one simply extended the imputation to dwelling and appliances. This would cover the consumption services of dwelling and appliances together. Of course, the UK CPI could not be calculated this way, and still be, as it is now, the UK HICP.
    Your own question to Mr Pullinger was poorly answered. You asked why homeownership costs should be measured using imagined costs when real costs were available. Mr. Pullinger switched the conversation to a discussion of the problems in measuring Toberlone bars when the size changes. Surely it is the height of the absurd to compare imputing a price for a differently sized Toberlone bar, possibly in a single outlet, in a given month with proxying homeownership costs all over the UK on an ongoing basis. Mr Pullinger’s response echoed a phrase from the Consumer Price Advisory Committee’s report in April 2012, when it opted for a rental equivalence approach in CPIH: “The criteria not met relate to the use of imputed (rather than actual) prices. Imputation is, however, already used elsewhere in the CPI, albeit to a lesser extent, e.g. to calculate the base price when a non-comparable item is introduced.”
    The analogy should be absolutely rejected. Unfortunately the phrase “imputed rents” promotes this kind of mistaken thinking. We talk about imputed rents for an equivalent rent approach to measuring OOH costs as if using rents as a proxy for OOH costs were no different from the use of imputations to solve quality adjustments. They are entirely unrelated issues. Eurostat has never prohibited the use of imputed prices for quality adjustment although it does have some restrictions on their use. It certainly does prohibit the use of proxies to measure consumer price change in the HICP (and the UK CPI is identical with the UK HICP) and that is one reason why there is no proxying of bank services as can be found in the household final consumption expenditure deflator.
    The CPIH is a composite of an index that categorically rejects proxies, the UK HICP, and a proxy index for homeownership costs. It is absurd that such a fusion of incompatibles should be considered an appropriate headline measure of inflation for the UK.

    • Hi Andrew and thank you

      I was surprised when the National Statistician John Pullinger raised the Toblerone issue as like you I feel it is nothing to do with what has happened with housing costs. Sadly my reply is very faint on the official recording as they had trouble with the microphone but I replied in that fashion. If you have a triangle missing from a Toblerone you adjust and it is easy, I have no idea how that stretches to imputed rents!

      I thought the John Wood point was excellent and it resonated around the room but the propaganda machine just rolls on. I have just watched the BBC News version which simply asserts that prices are rising at 2.3% per annum with no qualification whatever., or mention of other measures.

  7. So let me see …Government debt is £1.7T private debt not far behind ,prices are rising,wages are falling in real terms,the currency has depreciated significantly over the last 9 months,we are about to leave the single market our largest trading partner and the United Kingdom.We as a nation are in real trouble inflation will continue to increase for at least the next few months,if there is a loss of confidence in the bond market(why there is still any confidence left is beyond me) and interest rates rise.
    Yet a significant proportion of the population has confidence in our Government I believe we are heading for the worst economic and political crisis in our history!

    • ‘ I believe we are heading for the worst economic and political crisis in our history!’

      To be fair,the seeds were sown when they bailed RBS amongst many other things.Whether we leave the EU or not,is really neither here nor there.

      Let’s be honest,the EU will likely be gone in ten years.

      Being the first to leave a crap party to be guaranteed a taxi is no bad thing

      • Dutch when you are on a sinking ship you don’t hasten its demise by scuttling it prematurely,when you will perish along with the other passengers.
        Very few people love the EU but leaving just like Scottish independence is not the solution to the problem both are going to make the problems we face worse.
        The crones capitalist system is failing just like the communist system,you cannot borrow to infinity that is the problem.
        These manipulated figures are an attempt to con the population.

        • As a Eurosceptic Remainer I agree, PF. The Remainer says abandoning ship is the wrong solution. The Eurosceptic says the right and proper “solution to the problem” has proved very hard to find and, worse, seems to get further away as the years slip by — which, coincidentally, could also be said of the credit crunch, the bust banks and the debt.

          Very depressing all round.

    • I think there is confidence in the bond market for the wrong reasons. Instead of buying gilts (or at least not selling them) because of a belief in UK’s sound fiscal position, bond investors calculate that the BoE will ride to the rescue with more QE if yields rise too much. I also suspect that with equity markets at record highs and due a correction at some point fairly soon, some investors are expecting a rotation into bonds.

      The true test will be inflation and the value of the pound. If the former gets too high and latter too low I can see big pressure on the gilt market because the BoE will have painted itself into a corner. There could be point at which whatever monetary juice Carney’s gang offer the bond market is nullified by a weaker currency and rising prices. If we reach this point the consequences will be very bad indeed.

  8. Shaun,

    Thanks as ever for the continuing education you provide to laymen like me about the minutiae of CPI,CPIH and RPI.

    It’s an absolute scandal that our gagged British MSM never mentions any of these issues but frets over whether Russia hacked the Democrats email servers (try not giving them your password).
    I’d love the see them take the BoE and ONS to task for what they’ve done to ordinary working people but it won’t happen with the current elite swapping corporate armchairs every few years.

    • Yes its not as if the BoE’s lies and epic failure are difficult to call out … yet its only us loonies who go to the fringes on what are deemed “fake news” sites who are overly aware.

      Still at least we know what its like to live inside a George Orwell novel.

  9. Everything is the fault of Brexit; it is handy to have a whipping boy! Yesterday I saw an interview with Lord King; exceptionally reasonable , understated, and intelligent. He highlighted that the real issue with our economic mess is not Brexit but our trade deficit; running at 6% GDP! We have managed in a relatively short period of time to have sold off 1/3 of our industry to overseas buyers; sold £100B of London housing,in six years, to overseas buyers: government borrowing overseas of £500B; and turned a very satisfactory creditor nation status to that of being a nett debtor nation.
    Wonderfully, it has taken a Labour governrment, a coalition government, and a conservative government to achieve this. How can we top this?

    • Hi Shackec

      Life is certainly easier as an ex Bank of England Governor! Is it not a job that some want but then regret having? As to Brexit and inflation that seems yet to arrive as we are at 2.3% and Germany is at 2.2%. On a different measure the US CPI is at 2.7%. . So the effect will be felt as we go forwards sadly although that has not stopped some from claiming it has arrived.

      • Questions include.

        If/When will ZIRP, QE etc trigger investor flight ?
        What sort of counter-reaction will we get following years of negative real interest rates ?
        Will it fizzle into stagflation or explode into hyper-inflation ?

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