Yesterday the Economic Affairs Committee took a look at the Retail Price Index measure of consumer inflation in the UK. An excellent idea except as I have contacted them to point out.
Accordingly I am making contact for two reasons. Attending the event would give your members exposure to a much wider range of expertise on the subject of the RPI than the limited group you have today. Also it will help you with the subject of balance as the four speakers you will be listening too today are all against the RPI with some being very strongly so. This gives a very unbalanced view of the ongoing debate on the subject.
The event I refer too is this evening at the Royal Statistical Society at which I will be one of those who reply to the National Statistician John Pullinger.
I intend to point out that the RPI does indeed have strengths and it relates to my letter to Bank of England Governor Mark Carney from February.
“. I am not sure what is a step up from known error but I can say that ignoring something as important to the UK as that sector when UK house prices have risen by over 29% in your term as Governor when the targeted CPI has only risen by more like 7% is exactly that.”
This is because it makes an effort to reflect this.
This is because the RPI does include owner occupied housing and does so using house prices and mortgage interest-rates. If we look at house prices we see that admittedly on a convoluted route via the depreciation section they make up some 8.3% of the index.
This compares for example with the Consumer Price Index which completely ignores the whole subject singing “la,la,la” when it comes up. There has been a newer attempt to reflect this issue which I look at below.
Also it means that the influence is much stronger that on the only other inflation measure we have which includes house prices which is CPI (NA). In it they only have a weighting of 6.8%. So the RPI is already ahead in my view and that is before you allow for the 2.4% weighting of mortgage interest-rates.
As you can see the new effort at least acknowledges the issue but comes up with a lower weighting. This is because they decided that they only wanted to measure the rise in house prices and not the land. This is what they mean by Net Acquisitions or NA.
Now with 8.3% ( 10.7%) and 6,8% in your mind look what happens with the new preferred measure CPIH.
Now let me bring in the alternative about which the National Statistician John Pullinger and the ONS are so keen. This is where rather than using house prices and mortgages of which there are many measures we see regularly in the media and elsewhere, they use fantasy rents which are never actually paid. Even worse there are all sorts of problems measuring actual rents which may mean that this is a fantasy squared if that was possible.
But this fantasy finds itself with a weight of 16.8% or at least it was last time I checked as it is very unstable. Has our owner-occupied housing sector just doubled in size?
As you can see whilst you cannot count the (usually fast rising ) value of land it would appear that you can count the ( usually much slower rising) rent on it. That is the road that leads to where we are today where the officially approved CPIH gives a lower measure than the alternatives. Just think for a moment, if there is a sector in the UK with fast rising inflation over time it has been housing. So when you put it in the measure you can tell people it is there but it gives a lower number. Genius! Well if you do not have a conscience it is.
Yet the ordinary man or woman is not fooled and Bank of England Governor Mark Carney must have scowled when he got the results of his latest inflation survey on Friday.
After all when asked ( by the Bank of England) they come up with at 3.1% a number for inflation that is closer to the RPI then the alternatives.
Just because people think a thing does not make it right but it does mean you need a very strong case to change it . Fantasy rents are not that and even worse they come from a weak base as illustrated below.
The whole situation gets even odder when you note that from 2017 to this year the weighting for actual rents went from 5.6% to 6.9%.
Who knew that over the past year there was a tsunami of new renters? More probably but nothing like a 23% rise. This brings me back to the evidence I gave to the UK Statistics Regulator which was about Imputed Rents which relies on essentially the same set of numbers. I explained the basis for this was unstable due to the large revisions in this area which in my opinion left them singing along to Fleetwood Mac.
I’m over my head (over my head)
Oh, but it sure feels nice
Today’s data
Let me start with the number which was much the closest to what people think inflation is according to the Bank of England.
The all items RPI annual rate is 3.3%, down from 3.4% last month. The all items RPI is 280.7, up from 279.7 in April.
So reasonably close to the 3.1% people think it is as opposed to.
The all items CPI annual rate is 2.4%, unchanged from last month. The all items CPI is 105.8, up from 105.4 in April
When we ask why? We see that a major factor is the one I have been addressing above.
Average house prices in the UK have increased by 3.9% in the year to April 2018 (down from 4.2% in March 2018). This is its lowest annual rate since March 2017 when it was 3.7%.
In spite of the slow down in house price inflation it remains an upward pull on inflation measures. You will not be surprised to see what is slowing it up.
The lowest annual growth was in London, where prices increased by 1.0% over the year.
Now let me switch to what our official statisticians,regulators and the economics editor of the Financial Times keep telling us is an “improvement” in measuring the above.
The OOH component annual rate is 1.1%, down from 1.2% last month.
Which is essentially driven by this.
Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to May 2018; unchanged from April 2018.
So they take rents ( which they have had all sorts of trouble measuring and maybe underestimating by 1% per annum) and imagine that those who do not pay rent actually do and hey presto!
The all items CPIH annual rate is 2.3%, up from 2.2% in April.
I often criticise the media but in this instance they deserve praise as in general they ignore this woeful effort.
Comment
Today has been a case of me putting forwards my views on the subject of inflation measurement which I hold very strongly. This has been an ongoing issue since 2012 and regular readers will recall my successful battle to save the RPI back then. I take comfort in that because over time I have seen my arguments succeed and more and more join my cause. This is because my arguments have fitted the events. To give a clear example I warned back in 2012 that the measure of rents used was a disaster waiting to happen whereas the official view was that it was fine. Two or three years later it was scrapped and of course we saw that the Imputed Rent numbers had a “discontinuity”. The saddest part of the ongoing shambles is even worse than the same sorry crew being treated as authorities about a subject they are consistently wrong about it is that we could have spent the last 6 years improving the measure as whilst it has strengths it is by no means perfect.
Let me give credit to the Royal Statistical Society as it has allowed alternative views an airing (me) and maybe there is a glimmer from the House of Lords who have speedily replied to me.
Staff to the Committee will be in attendance this evening, and we have emailed the details to the members: the unfortunate short notice and the busy parliamentary schedule currently means it may be unlikely for them to attend. We will report back to them on the event nevertheless.
I hope the event goes well for you.
Returning to today’s we now face the risk that this is a bottom for UK inflation as signalled by the producer price numbers.
The headline rate of inflation for goods leaving the factory gate (output prices) was 2.9% on the year to May 2018, up from 2.5% in April 2018.Prices for materials and fuels (input prices) rose 9.2% on the year to May 2018, up from 5.6% in April 2018.
This has been driven by the rise in the price of oil where Brent Crude Oil is up 56% on a year ago as I type this and the recent decline in the UK Pound £. This will put dark clouds over the Bank of England as the wages numbers were a long way from what it thought and now it may have talked the Pound £ down into an inflation rise. Yet its Chief Economist concentrates on matters like this.
Multiversities ‘hold key to next leap forward’ says
@bankofengland Chief Economist Andy Haldane ( @jkaonline)
Isn’t that something from one of the Vin Diesel Riddick films?
Notayesmanseconomics's Blog 
An admirable fight by you to show the government how it is miscalculating infllation Shaun, but they don’t really want to measure it correctly do they? That is the problem, because once you start to disclose the horrible truth of the UK’s economic mismanagement and decline, the people might start to wake up from their house price inflation induced stupor, and start to realise they are getting poorer and poorer every year, more indebted, and will no longer be able to rely on things like the NHS and the basic state pension in years to come.
Inflation measuring is however just one item in the Alice in Wonderland world we now live in, where the truth is replaced by media spin, fake news i.e government propaganda and false statistics – how about some others – unemployment, average wages, immigration figures, economic growth and government debt(unfunded future pension liabilities/PFI)?.
Carney AND Draghi now have amassive problem if the Fed keep increasing interest rates(as they surely will, the US economy already booming, has just had a bucket of petrol thrown on it by Trump, there are massive shortages of workers, wage rates are going up and employers still cannot fill positions), as both really have no intention of putting up rates – unless they want to burst their property bubbles and put the final nails in their banking coffins, interesting times.
Kevin, an admirable assessment of the true global position where lies beget the status quo and the status quo by the same token becomes ever more difficult to maintain. Something has to give, a higher calling, a more imposing elephant in the room, a massive distraction.
A war with North Korea, A Brexit, A Quitaly, Whatever.
Yes Paul, when the stock and bond market bubbles finally implode, you can be sure the central banks won’t be blamed, there will be some other distraction or fall guy narrative spun by their main stream media puppets.
Treason May’s answer seems to be a war with Russia:
the false flag Skripals “poisonings”, which were actually carried out by MI5 with the Skripals’ consent: Sergey has a taste for the finer things, acquired by treachery, and since Russia wouldn’t have him back, this earned him a cool £150k:
http://wsbuzz.com/world-news/yulia-skripal-poisoned-days-gaining-access-150k-secret-bank-account/
Lies about Syrian chemicals weapons attacks:
https://gosint.wordpress.com/2018/04/17/robert-fisk-no-gas-attack-occurred-in-douma-on-april-7th/
Or indeed, the coup in Ukraine, which overthrew a democratically elected, pro-Russian Govt. in favour of a band of extreme right anti-Russian nationalist thugs, funded by EU and USA and which FRIGHTENED the Crimea into the arms of the Russians.
https://www.theguardian.com/commentisfree/2014/apr/30/russia-ukraine-war-kiev-conflict
Then she rattles on about Russia’s malign activities.
Hi therrawbuzzin
I steer clear of the Russia debate partly because it is politics but also because as a Chelsea fan I am conflicted via Roman Abramovich. As to Syria these wars have long troubled me and there is a link to inflation measurement because just like it we get “improvements” but the situation continues to get worse.
Hi Shaun
You more than the vast majority know what hinges on these statistics; how many billions have been saved by benefits being uprated by CPI rather than RPI? The answer as you know is a very large number indeed.
You’re also aware that the unemployment statistics were changed constantly in the 1980s; around thirty times if memory serves and in only two occasions was the result to increase the count; all the others lowered it. Was this the search for better ways of measurement? Maybe but it looks very suspicious doesn’t it?
The same goes for inflation; are these deficiencies just bureaucratic obtuseness or is it “looking the other way” because TPTB know full well where this all leads? Cock up or conspiracy? You choose; I’m inclined normally to choose cock up but, on the other hand …..
Hi Bob J
The unemployment numbers were gloriously satired in Yes Prime Minister when even Jim Hacker told us that nobody believed the numbers. That was 1983 I think.
The RPI was attacked last night for giving money away to the “Gnomes of Zurich” by Chris Giles of the Financial Times. An odd statement as I worked in the UK Gilt market for many years and loads of UK pension funds traded/invested in and out but I can recall only one customer from Zurich and have no idea if Ralf was a Gnome or not!
Anyway my numbers hit home and I had the opportunity to push the point in conversation with the National Statistician John Pullinger over a drink. So I am doing my best.
You Quote Mr Haldane at the end of your “Comment” where he refers to “Multiversities”.
Not a word I use every day, I looked it up expecting something along the lines of Multiple Universes.
This is typical of what I found
multiversity: A university that has numerous constituent and affiliated institutions, such as separate colleges, campuses, and research centers.
Is that what he was referring to? What is the relevance to your argument?
Hi Peter
It was an attempt at humour as well as a serious point. As you have asked about it the humour must have failed so apologies.
As a PS to the above, the Fed just raised rates and said there’s another two more increases coming this year,putting its funds rate at 2.4% by year end, versus the Bank of England sticking to its current 0.5%, I wonder how many cents a pound will buy then? – over to you Mark!!!
Hi Kevin
He is busy doing this I think.
As ever Shaun,your work on exposing these inconsistenceis at the highest levels is appreciated by many ordinary plebs like myself.
I’ve learned so much from reading your blog.
One question from the quote below.
‘This is because the RPI does include owner occupied housing and does so using house prices and mortgage interest-rates. If we look at house prices we see that admittedly on a convoluted route via the depreciation section they make up some 8.3% of the index.’
I thought the RPI used mortgage interest but not the actual price of the house.Can you clarify if you have time.
Hi Dutch
It is an awkward section but in its attempt to rubbish the concept the ONS give a brief explainer.
“Currently house prices are used as an approximation for depreciation. This assumes that changes in house prices reflect changes in the costs of the renovations needed to maintain the value of the property;”
This is semantics really as those responsible for this were plainly trying to get house prices in the RPI! Meanwhile remember those criticising it want Imputed Rents which do not exist
“there is no evidence to suggest this is the case.”
I hope this helps.
Well Done Shaun, Thanks very much. Your efforts to bring some sense into the statistics arena are very much appreciated.
A pleasure Eric.
Great blog as usual, Shaun.
Nice to hear that the Lords responded immediately to your letter. They really should have another four witnesses invited to talk about the future of the RPI. I would vote for John Astin, Arthur Barnett, Jill Leyland and yourself, but lots of other people, not all of them in the RPI CPI User Group, could have given a far more balanced view of the strengths and weaknesses of the RPI than the witnesses the Lords heard.
I was much keener on the UK CPIH(NA) than you were. It is designed as a macroeconomic index, so would look like a better alternative to the UK HICP (aka the UK CPI) than any RPI-derived measure, since the RPI was designed as a household-oriented measure. Now, though, I am sharing your skepticism about it. When I complained about how it seemed the ONS CPIH(NA) basket share for OOH looked like it was underestimated to Tanya Flower of ONS, she claimed that everything was being done according to Eurostat standards. She is probably right, but what does that say about the standards?
The annualized inflation rate for the CPIH between 2009Q3 and 2017Q3 was 2.1%; for the CPIH(NA) it was 2.2%. the same as for the UK HICP (aka the UK CPI) so on a take-it-or-leave-it basis I would still take the CPIH(NA) as a target inflation indicator for the Bank of England over the CPIH, but the difference is so trivial it makes anyone who pursues the issue look like a nitpicker.
By contrast, if you look at the RPI ex mortgage interest payments ex council tax, its annualized rate of inflation over the same period was 3.3%. Even if you adjust for the formula effect, the adjusted inflation rate is about 2.6%, about 0.4 percentage points above the UK HICP or the CPIH(NA) and 0.5 percentage points above the CPIH. The difference would be even greater if the RPI were calculated including stamp duty, as even Paul Johnson recognized was logical.
If you look at the most recent data, the RPI ex mortgage interest ex council tax inflation rate adjusted for the formula effect was 2.6% for May, up from 2.5% in April. (This is lower than the RPIX inflation rate adjusted for the formula effect, since council tax was up by 4.9% in April, and therefore in May.) That inflation rate went from 2.6% in April to 2.7% in May.) This looks a lot more plausible than the CPIH inflation rate of 2.3% for May, up from 2.2% in April.
The double-digit inflation rate for the RPI for dwelling insurance in May, 10.3%, is ignored in the CPIH, where it is supposedly reflected in imputed rents. It should show up in the CPIH(NA) series, but it will be underweighted because, like all the HICP-based measures, the CPIH(NA) adopts a net premiums approach rather than the gross premiums approach used in the RPI.
People here are very happy that the FIFA World Cup will be coming to Canada for the first time ever!
Hi Andrew and thank you
Firstly congratulations on getting a share in the World Cup.
As to the CPI NA weights you comment is timely as Tanya Flowers has contacted me today
“Jonathan Athow mentioned that you had some further questions about the OOH weights after the RPI event yesterday”
So let us see what happens next as I will send over a copy of this blog which is essentially what I said at the meeting. It was recorded and if I recall correctly the last person to speak mentioned the RPIJ which you take a particular interest in. Hopefully the recording will be available soon.