This morning the Chancellor of the Exchequer has announced his plans for the Retail Price Index or RPI. This is an issue close to my heart and something I have put a lot of time and effort into since its future became the subject of doubt in 2012. The moment we were told on Monday that today was the day I feared the worst along the lines of the saying “a good day to bury bad news”. With the Chancellor’s Budget Statement and the ongoing debate in Parliament over Brexit today has proven to be a day that the UK deep state thinks it can get away with something it has been angling for since 2012.
In essence HM Treasury has wanted to scrap the RPI because it is expensive in terms of the interest paid on UK index linked Gilts and for various pensions. Of course those making such decisions often benefit from RPI linked pensions it is for others and particularly younger readers that they want it to go. The last 7 years have seen various methodological efforts mostly around the formula effect but they have found themselves up against opponents like me and their cases have foundered and sunk.
Housing Costs
This is another area where up until today the HM Treasury effort had mimicked the Titanic. If we go back to 2002/03 the UK introduced a main measure of inflation that excluded owner occupied housing costs called CPI. Why? Well in a familiar theme it is cheaper for the Treasury as it gives a lower reading than the RPI, and more subtly when it is put in the GDP numbers it gives a higher reading ( averaging about 0,23%).
Next they though they could do better and find a way of measuring housing costs and further reduce the inflation number. That hit the barrier that house prices are soaring so instead of real numbers they decided to make some up. This is the Rental Equivalence system where they assume home owners pay rent to themselves when they do not. Rental Equivalence is the inflation version of Imputed Rents. In the UK the measure based on this is called CPIH and partly due to my efforts has been widely ignored.
House of Lords
The Economic Affairs Committee published a report in January after taking evidence from various sources including me and here is an example.
The Deputy National Statistician, Jonathan Athow, said that the lack of a measure of owner-occupier housing costs in CPI was its “major weakness”. Shaun Richards, an independent adviser to pension and investment funds, said that “if there is something untenable in my opinion it is a measure of inflation which completely ignores a very important sector which is owner-occupied housing.
In their report they then went on to reject the Rental Equivalence methodology of CPIH.
We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs. The UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on the best method for capturing owner-occupier housing costs in a consumer price index.
Over to the UK Statistics Authority
Here is their response to this.
In light of the 10 years of development and consultation, ONS are not minded to undertake any further engagement with users and experts specifically on rental equivalence and owner-occupier housing costs. There is never likely to be agreement on a single approach.
As no doubt many of you have spotted that is shifting the goalposts as the EAC from the House of Lords had rejected an approach. Why are they shifting the goalposts? Well they are back with the rejected approach.
ONS views rental equivalence as the correct approach conceptually for an economic measure of inflation, and one where sufficient data is available to make it practical. Of
course, they remain committed to ongoing monitoring and development of the CPIH and the Household Cost Indices.
Here is the crux of the matter. They have made a decision and regardless of the objections and argument they keep making the same decision. They lose the debate but come back again.Over time I have rallied support at the Royal Statistical Society ( which in another “accident” of timing is in a conference this morning and cannot reply) and as you can see above the House of Lords. So it leaves me mulling this from Hotel California.
And in the master’s chambers,
They gathered for the feast
They stab it with their steely knives,
But they just can’t kill the beast
Another problem with Rental Equivalence
Tucked away in the House of Lords report was something of a bombshell.
We note that the private rental market is subject to its own distortions and may not provide a good proxy for owner-occupier housing costs.
The fantasy structure of Rental Equivalence relies on good data from ordinary rents. Just for clarity I have no problem at all with the concept of using rents for those who do. But there are two catches. They are hinted at in the quote above and let me specify them. There are doubts that the properties which are let are that similar to those which are owned. But more fundamentally I have seen experts post concerns that due to the mixture of new and old rents being incorrect in the survey used the number is up to 1% too low. Since it claims currently rental inflation is of the order of 1% that is quite an issue!
Research
This is something we are regularly denied as for example work was done around 2012 around the Formula Effect but has never been published. I and others are of the opinion that fashion clothing and more recently computer game pricing are factors here. Today is not for the detail but I wrote to both the EAC and the Treasury Select Committee on this subject on February 26th as follows.
My understanding of this which I have checked with others is that the exact impact of the change is unknown because the Office for National Statistics suspended its investigation into this back in 2012. Perhaps one day it will properly explain why it did this but for now the main issue is that we do not know the precise impact until the proper research is completed and peer reviewed. I am sorry to have to point out that your letter is therefore potentially materially misleading and has already had a market impact on the price of index-linked Gilts.
This is a familiar theme where there are claims of research but when you ask for it then it does not appear. If I ever get a reply to that letter I will let you know.
I had other concerns but I am here just establishing a principle.
Comment
There are various conceptual issues here of which the simplest is that over the past 7 years the UK statistical authorities have pursued a campaign which has been one of propaganda rather than argument. We have done much better here as those of you who have followed the replies of Andrew Baldwin will know. He has made the case for the RPIJ measure which revealingly was first promoted but then abandoned by the UK statistical establishment when it did not give them what they wanted. Their behaviour was similar to a spoilt child taking their football home with them.
On a conceptual level the statistician Simon Briscoe has covered it well I think.
The details of the opportunities missed are in the table below but with ONS producing sub-standard documents like the infamous “shortcomings” paper, OSR failing (I think ever) to criticise anything that ONS has done on RPI, and the UKSA board not even trying to sort anything out (and being subservient to the Treasury), there is little hope.
The OSR is the Office for Statistics Regulation to which I gave evidence and I would say they ignored it but for the fact I believe it went straight over their heads.
Let me also address why the Bank of England supports this. Their main game is to inflate house prices. So if you keep house prices out of the inflation measure it is all growth or from their perspective jam today. First-time buyers or those trading up face inflation and face in many cases unaffordable properties yet according to the inflation numbers they are better off!
But there is a glimmer of good news. I suspect that the Chancellor Sajid Javid thought he would kick this particular can onto somebody else’s watch.
Today the Chancellor has announced his intention to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.
I intend to continue to fight on as the establishment view has crumbled so many times before. There is hope around the Household Cost Indices mentioned above although they are a good idea which the establishment are trying to neuter ( You will not be surprised that it is in the areas of housing costs and student loans). So let me leave you with the Fab Four.
The long and winding road
That leads to your door
Will never disappear
I’ve seen that road before
It always leads me here
Lead me to you door
Notayesmanseconomics's Blog 
Excellent sleuthing Shaun!!
Minister’s committee: There wasn’t a problem
Till you said there was a problem
So maybe YOU’RE the problem!!
Code: When the numbers dance the way we want we MAY implement it-(without revising past input discrepancies).
Hi Canuckistinian
I am sure from the point of view of the establishment I am a problem. I shall avoid walking under ladders and be more careful when I am on a Boris Bike.
I do not know if the excellent Yes Prime Minister was aired over in Canada but the last 7 years on this subject could be one of its scripts.
Never let them get away with it Shaun, if it weren’t for people like you and Andrew, who have such an advanced level of knowledge to challenge them on their lies and distortions, imagine how much worse it would be!
On the theme of distortions Carney admitted today that a no deal would not be as bad as predicted and wide off the mark on inflation which would be based mainly on the fall of the £.
https://www.dailymail.co.uk/news/article-7427237/Bank-England-predicts-No-Deal-damage-thought.html
Quite where he got a rise in unemployment to 7.5% is anyone’s guess particularly as there is a lack of skilled workers in the UK and both the NHS and social care are crying out for workers.
It would not surprise me if the fears of the worlds end have had to be downplayed because they were well overplayed previously the remainers determined to warn of the worst case scenario when often the worst fears don’t materialise.
Unemployment may well rise with robots coming along but robots should indeed help to improve the economy and we should embrace the technology which the government wants to do and place the UK in the fast lane and any jobs lost through robots will help to fill up the gaps elsewhere.
In the NHS they have to pay more money out for agency nurses which shouldn’t be needed if they are filled from the loss of jobs from the use of robots.
Sorry for the rant I know this blog was about inflation and I got carried away with inflation predictions by Carney and all credit to Shaun for the work he has done on this and the matters he has argued.
I am relatively new to this blog being a member months not years, and impressed with Shaun’s knowledge and arguments, and find the blog most interesting and informative.
If rental equivalence in the inflation measure is too low, does that mean imputed rents in the gdp measure is too low also? Yay, we could be rich?
Further, if doing away with the rpi means that contracts cannot include rpi and that it has to transition to cpi, will this reduce student loan costs, train fare rises etc even as pensions and gilt yields fall? Is there an element of swings and roundabouts to their thinking?
Hi Hotairmail
If may answer your second question first yes but I suspect terms will be adjusted by say the 1% per annum roughly gained. After all it was a choice to put RPI on things like rail fares.which they could have scrapped quite easily.
As to your first question lower rental equivalence inflation means that Imputed Rents in GDP are too high which looks bad news. But as they are a fantasy anyway nobody actually looses a single penny.
Great blog as usual, Shaun, on a very sad subject. Arthur Barnett warned me in advance a decision was coming and I had read it before reading your blog but totally agree with your “good day to bury bad news” assessment of the timing of the announcement.
Thank you for your kind words regarding my support of the RPIJ, and I loved the analogy with a child taking its football and going home. For a long time now, British people have been living with a zombie RPI, ergo a zombie RPIJ. In my own submission to the LEAC, in July, I concluded: “The decision by the ONS to maintain a zombie RPI should be reversed, with improvements to the CPI such as twice-a-month pricing of certain items that were not implemented for the RPI/RPIJ being implemented for them as well. Stamp duty should be added to the RPI/RPIJ, as even the Johnson report recognized was the logical thing to do. Later, the RPI/RPIJ could have its target population expanded to include all households. These reforms would bring the RPIJ closer to the HII ideal. Whether the UK finally achieves its HII objective through developing its HCIs [as opposed to developing the RPIJ] is a subject to debate, but that would be a debate about process, not about goals.”
I can’t claim any originality for any of these recommendations, and they are on the conservative side, accepting, at least for a while, the accounting approach to RPI that has been there since its February 1995 update. On the other hand, the reform the UKSA proposes is clearly reactionary. Imputed rents were very sensibly removed from the RPI in 1975, after their presence there had created a housing bubble. But as you say, if the main game of the Bank of England is to inflate housing prices, what the 1974 RPI Advisory Committee saw as a drawback, the powers that be see as a selling point. Real estate transaction costs are not consumption spending in national accounting terms, so the UKSA would want to take transaction costs like estate agents’ fees out of the RPI, not add stamp duty to it. The CPIH omits all real estate transaction costs. The UKSA is hypocritical in invoking national accounting principles in keeping these out of the CPIH, since in national accounting principles council tax is not part of consumption either. However, as you say, it’s all about housing prices. A measure or a proxy for stamp duty and other transaction costs must rely on housing prices, so they must be excluded. If council tax, which does not rely on housing prices, makes, or was expected to make, the CPIH more acceptable, then the UKSA will find a place for it, never mind the intellectual inconsistency revealed.
I noticed that Dame Kate Barker, as chair of the Stakeholder Advisory Panel on Consumer Prices, wrote: “Those [on the Panel] opposing rental equivalence point in particular to the risk that it is not understood by the ‘person in the street’ and so might reduce public confidence in the inflation statistics.” I wonder if that was really what people on the Panel were saying. The problem isn’t that the person in the street is too dumb to understand rental equivalence, it’s that the concept is too dumb for the person in the street to believe in it.
Hi Andrew and thank you
There have been many failings on this road which has been a shambles. For example RPIJ would have been a better choice than CPIH, yet it got orphaned whereas the inferior method got official support.
Also Dame Kate Barker was brought in to do a job which she is doing. She has been absent from Twitter today giving the impression that all this is an inconvenience for her.
You can’t help but laugh at people who say “although we’ve been forced to ‘consult’, that because we will never agree, we’re just going to plough on anyway”.
Hi Hotairmail
It is because they know so much better than us. They know this because they keep getting things wrong…..Oh hang on.
In essence they appoint themselves as patricians and do their best to treat the rest of us as plebeians.
Shaun,thanks as ever for your work on this.Incredible.Great post today.
Is the moral of the story that one price index is appropriate for renters and another for owners? The widening class cleavage renders a single figure obsolete?
Hi Ed and welcome to my corner of the web
Actually all of the inflation measures I can think of use rent as a measure for renters which is entirely appropriate. There are doubts as to how well it is measured but the principle is pretty clear. It is the use of rents for those who do not rent that is the rub as Shakespeare would put it.
Glad you agree. In practical experience (including my own) new and recent mortgaged buyers experience money costs of housing (servicing loans + utilities etc as for rents); if and when they accumulate some equity the capital gain dulls the pain of those costs and, eventually, they have an asset plus housing costs which are almost zero. Conventional NI accounting (which I was once taught) treats their imputed rent as income throughout, and your beef is that the imputed rent gets used as the ‘price’ they pay for price indexation purposes. (All the borrowing, repayment and asset issues live in a separate universe of saving and financial accounting.) Michael Edwards @michaellondonsf Not sure where to go from here.