The plan to castrate the Retail Prices Index brings shame on UK statistics credibility

The Retail Prices Index or RPI has come in for quite a bit of official criticism over the past decade sometimes around the issue of what is called the Formula Effect and more rarely about the way it deals with the housing sector. The latter is more rare because many of the critics are not well informed enough to realise that house prices are in it as they are implicit via the use of depreciation. However to my mind this has been something of a sham and the real reason was highlighted in yesterday’s post.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%.

As you can see the RPI consistently gives a higher inflation reading hence using it real wages are lower. That is why official bodies such as the UK Statistics Authority with the dead hand of HM Treasury behind them keep trying to eliminate it. Let me illustrate by using the measures they have recommended RPI, then CPI and then CPIH as you can see from the quote above they keep recommending lower numbers. What a coincidence! This flatters real wages and GDP as consumer inflation is around 24% of the inflation measure used there so yes UK GDP has been inflated too. In fact by up to 0.5% a year,by the changes according to the calculations of  Dr.Mark Courtney.

They are back as this from the Chair of the UK Statistics Authority Sir (hoping to be Lord) David Norgrove shows.

We have been clear for a long time that RPI is not a good measure of inflation and its use should be discouraged. The proposals we put to the Chancellor are consistent with this longheld view.

That is very revealing as we have had several consultations and they have lost each one. In fact my view has gained more support over time because if you look at the facts putting a fantasy number as 17% of your inflation index as is done by putting Imputed Rents in CPIH is laughable when you can use an actual number like house prices. This is how they explain they lost. It does allow me to update my financial lexicon for these times where “wide range of views” equals “we keep losing”

There has since then been extensive consultation
and discussion about inflation measurement. All the statistical issues have been well aired. A
notable feature of these discussions was the wide range of opinions

They have lost so badly that this time around they have taken the possibility of losing out of the new plan.

The Authority’s consultation, which will
be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

As you can see it is about how and when it will be done rather than what should be done. The plan is to put Imputed Rents in the RPI so it also records lower numbers. Regular readers may have noted Andrew Baldwin asking me to support his effort to stop a change to the inflation numbers calculated, which I did. You see that change will stop people like him and me being able to calculate what the impact of changing the RPI will be. You see at this point how the deep state operates. Along the way it exterminates an inflation measure which Andrew has supported after I may note the UK statistics establishment presented it ( RPIJ) as the next best thing to sliced bread. Before behaving like a spoilt child and taking their football home with them so no-one else can play.

Let me also address the Formula Effect issue. I have just explained above how suddenly they do not want people to be able to calculate it. Suspicious eh? But it is worse than that because all of the official propaganda ignores the fact that a lot of it is due to clothing prices and fashion clothing. We could find out as the statistician Simon Briscoe has suggested by suspending some of the clothing section for a while or producing numbers with and without it. After all CPI was the official measure for over a decade and it ignored owner occupied housing which is 17% of the index when included. But apparently you cannot exclude less than 1% which leads me to believe they already know the answer which presumably would be found in the 2012 pilot scheme which has been kept a secret.

Today’s Data

There was a quirk in the series meaning a rise was likely but not this much.

The all items CPI annual rate is 1.8%, up from 1.3% in December.

The factor which was mostly expected was this.

In January 2020, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services……….However, in January 2020, its contribution increased to 0.55 percentage points (an increase of 0.19 percentage points from December 2019), as the gas and electricity price reductions from January 2019 unwound.

I was a bit slack yesterday in saying that inflation will fall to help real wage growth when I should have put it is heading lower but the impact of regulatory moves will cause bumps in the road. Apologies.

Changes to Ofgem’s energy price cap introduce some volatility — with CPI inflation expected to pick up to 1.8% in 2020 Q1, before falling back to around 1¼% in the middle of the year. The expected reduction in water bills as a result of action by the regulator Ofwat is also expected to contribute to the fall in inflation in 2020 Q2.  ( Bank of England)

As it does not happen often let us congratulate the Bank of England on being on the money so far. Returning to UK inflation it was also pushed higher by this.

Rising pump prices and upward contributions from transport services (in particular, airfares) meant transport’s contribution rose to 0.22 percentage points in January 2020.

There was also a nudge higher ( 0.07% in total) from a more surprising area as we are know the retail sector is in trouble but clothing and footwear prices saw a slightly lower sales impact. There was a similar impact on restaurants and hotels where prices fell less than last year.Meanwhile.

The all items RPI annual rate is 2.7%, up from 2.2% last month.

House Prices

Sadly there are ongoing signs of a market turn.

The latest house price data published on GOV.UK by HM Land Registry for December 2019 show that average house prices in the UK increased by 2.2% in the year to December 2019, up from 1.7% in the year to November 2019 (Figure 1). Over the past three years, there has been a general slowdown in UK house price growth (driven mainly by a slowdown in the south and east of England), but there has been a pickup in annual growth since July 2019.

I was contacted on social media yesterday to be told that the market has really turned in Wales. The official numbers seem to have turned the other way though…

House price growth in Wales increased by 2.2% over the year to December 2019, down from 5.5% in November 2019, with the average house price in Wales at £166,000.

Maybe they will turn back in January.

Comment

A lot of today’s article has been comment via fact based opinions. Let me add two more factors. Firstly the UK establishment just as the Euro area has released it cannot get away any longer with ignoring the owner-occupied housing sector in its official inflation measure. Meaning the screams of those unable to afford housing have even penetrated the clouds around the skyscraper Ivory Towers of the ECB. Next whilst this may seem like a fait accompli it has seemed like this as every consultation has begun but each time so far I have ended up winning. If you think about it they are admitting they cannot win on the arguments by trying to eliminate them from the consultation.

As to this month’s data it is a shame to see a rise but with the UK Pound £ and the oil price where they are the trend should remain downwards. But there will be swings and roundabouts as the impact of utility price regulation comes into play.

5 thoughts on “The plan to castrate the Retail Prices Index brings shame on UK statistics credibility

  1. Just a brief scan on yesterdays wages because I was otherwise engaged and todays inflation data.

    Shaun yesterday:

    “Wages
    Here the news has been less good. Let me explain using today’s release.
    Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 2.9% from 3.2% last month for total pay (including bonuses), and to 3.2% from 3.4% for regular pay (excluding bonuses).”

    I am not particularly intertest is CPI and all those other measures but more concerned with RPI which stated today yoy came out at 2.8 %

    Wage growth slowed down sharply now and RPI going up Joe Public now finding that he isn’t much better off now than he thought he would be !

    I have to say I am slightly surprised at some of the inflation data with oil prices falling and the £ rising I have to admit that I had thought the inflation figures would have been weaker than reported.

    I think I scanned the whole sale gas a week or tow ago doing some googling and it looked to me gas prices were falling but I suppose some of these things time lag and Shaun is better able to work this out than a simplistic mind from Peter Pan !

    I suppose I realised that the discounts on retail were not as seep as the year before and that would put pressure on the RPI on the upside. The retailers not slashing prices as deep despite the competitive retail environment.

    As a brief summary of the above I take the view that prices and wages are now almost equal if Joe Blogs wants a better standard of living he will have to work extra hours and have less time for social activities or with his family.

    Of other interest today are the government views on immigration and we are back to the so called 8 million or so “economical inactive people” which includes student and a woman or man looking after granny and making her lunch etc… !

    I agree that some of the so called careers may themselves get benefits and instead of making grannies lunch she is capable of getting a ready meal and putting it in the microwave !

    Now don’t get me wrong I am not getting into the morality of all this as there are genuine cases but agree the benefit system got out of hand over many a year under a labour government and many people found themselves better off not working with all the benefits they received and I am in favour of the new rules and policies.

    if we get back some of those economic inactive it will mean we don’t need as many immigrants which Joe Public been annoyed about over the years.

    The £25,000 figure mentioned is probably a good starting minimum salary for immigrants but I think the rules are relaxed for certain necessary workers in certain jobs.

    I have always taken the view that all the retail jobs lost many could retrain and go into the NHS and care industry where there is a need for carers and a short supply.

    Sorry about the ranting on other matters they all help to understand what is happening in the UL and where we are heading.

    • there there, have a nice cup of tea ….. calms the nerves you know

      many carers only get the basic , about £70 pw . considering inflation thats not a lot .

      and we’ll all be on UBI soon as virtually no one will have a job outside of the entertainment industry ……

      Forbin

    • also petrol prices dropping here in surrey , 5-6 p per ltr

      I therefore predict (!!) that CPI/RPI will drop a significant amount next month – isn’t that when they calculate bennies ?

      Forbin

  2. Hello Shaun,

    so change the RPI index when they said it was depreciated ? ie, not worth the hassle ?

    Things that make you go hmmmm

    Forbin

    PS: considering RPI is used for certain things , can they legally do that?

    • Hi Forbin

      There are some index-linked Gilts where the rules are tighter and I think there are about 4 left and they go by 2030. So that is one of the reasons the previous Chancellor Sajid Javid kicked the can until at least 2025. It would be embarrassing to go to court and lose.

      As to pension funds it has depended on how inflation linking was defined. Pensioners have been lucky if their fund had specified RPI but now we see they also needed something pinning its definition down as well So we learn again to take great care ( and much more than is often taken) with important financial documents. It is a shame to have to type this but governments will try and weasle their way out of such commitments.

      Theoretically they are in the wrong as it was introduced as a cost of living measure and how can Imputed Rents be a cost of living?

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