The UK Plan is to turn a good inflation measure (RPI) into a bad one ( CPIH)

A feature of these times is that we see so many official attempts to hide the truth. In the UK at the moment one of the main efforts is around the inflation numbers and next week on the 25th we will get an announcement about it. The official documentation shows the real reason for the change albeit by accident.

Since 2010, the measured rate of RPI annual inflation has been on average one percentage point per annum above the CPIH.

They want to get rid of the RPI for that reason that it gives a reading some 1% higher as they can then tell people inflation is 1% higher at a stroke. The “independent” UK Statistics Authority and National Statistician have  thoroughly embarassed themselves on this issue. There have been 2 main efforts to scrap the RPI both of which have crumbed under their own inconsistencies and now the plan is to neuter it by applying some Lord of the Rings style logic.

One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them.

In the future we will only have one inflation measure and it will be the one that has been widely ignored since its introduction in spire of desperate attempts to promote it.

The Authority remains minded to address the shortcomings of the RPI by bringing the methods and data sources from the National Statistic, the CPIH, into the RPI. In practice this means that, from the implementation date, the RPI index values will be calculated using the same methods and
data sources as are used for the CPIH. Monthly and annual growth rates will then be calculated directly from the new index values.

So the “improvement” will involve including rents which do not exist and they comprise quite a bit of the index.

Given that the owner occupiers’ housing costs (OOH) component accounts for around 16% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

For those unaware if you own your own home you are assumed to pay yourself rent and then increases in the rent you do not pay are put in the inflation numbers. Even worse they have little faith in the numbers used ( from actual renters) so they “smooth” them with an average lag of about 9 months. So today’s October rent numbers reflect what was happening around January and are therefore misleading. Putting it another way if you wish to have any idea of what is happening in the UK rental sector post pandemic do not look here for clues.

The supposedly inferior RPI uses house prices via a depreciation component ( a bit over 8%) and mortgage interest-rates ( 2.4%). Apparently using things people actually pay is one of the “shortcomings”. Meanwhile back in the real world if I was reforming the RPI I would put house prices in explicitly.

I find myself in complete agreement with the TUC on this.

Nobody is claiming the RPI is perfect. But it remains the best measure for living costs and would be straight forward to modernise.

As has been shown across Europe it would be perfectly possible to have RPI existing in parallel to CPIH (​or CPI) and have the latter measure focus on guiding monetary policy.

We are disappointed that expert calls to retain the RPI have been repeatedly ignored. The Royal Statistical Society and House of Lords Economic Affairs ​Committee have both presented compelling evidence for keeping it.

The basic issue is that the inflation numbers will be too low.In addition measures of real wages will be distorted too. These things echo around the system as for example when RPI was replaced by CPI in the GDP data the statistician Dr. Mark Courtney calculated that GDP was then higher by up to 0.5% a year. If you cant change reality then change how it is presented.

Today’s Data

We see that inflation is starting to pick up.

The Consumer Prices Index (CPI) 12-month rate was 0.7% in October 2020, up from 0.5% in September.

Remember that prices are being depressed right now by the VAT cut.

On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.

I appreciated it last night when I bought a cooked chicken which has become cheaper. In terms of the inflation numbers we do have measures which allow for this. They are at 2.3% ( if you exclude indirect taxes called CPIY) and 2.4% ( if you have constant indirect tax rates or CPI-CT). We do not know exactly how prices would have changed without it but we do know that inflation would be a fair bit higher and would change the metric around Bank of England policy and its 2% inflation target.

The major movers were as follows.

Clothing; food; and furniture, furnishings and carpets made the largest upward contributions (with the contribution from these three groups totalling 0.16 percentage points) to the change in the CPIH 12-month inflation rate between September and October 2020………These were partially offset by downward contributions of 0.06 and 0.04 percentage points, respectively, from the recreation and culture, and transport groups.

You may note they have sneaked CPIH in there as it is the only way they can get it a mention as it is so poor it is widely ignored.

Another point of note is that the inflation measured by CPI is in services at 1.4% whereas good inflation is 0%.

If we look at the RPI we see another reason why it is described as having “shortcomings”. It has produced a higher number as it has risen from 1.1% in September to 1.3% in October.

The trend

In terms of the 2 basic measures we see that opposite influences are at play. The UK Pound £ has been reasonably firm and is just below US $1.33 as I type this so mo currency related inflation is on the way and maybe a little of the reverse. However the price of crude oil has been picking up lately with the January futures contract at US $44.27. Whilst this is around 30% below a year ago the more recent move this month has been for a US $7 rise.

In terms of this morning’s release there was a hint of a change.

The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to October 2020, up from negative growth of 1.7% in September 2020……The price for materials and fuels used in the manufacturing process showed negative growth of 1.3% on the year to October 2020, up from negative growth of 2.2% in September 2020.

So less negative and at this point crude oil was still depressing the prices so we can expect much more of a swing next time around if we stay at present levels.

Petroleum products and crude oil were the largest downward contributors to the annual rate of output inflation and input inflation respectively.

House Prices

I think you can see immediately why they want to keep house prices out of the official inflation measures.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

They much prefer to put this in.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020.

Just as a reminder home owners do not pay rent so this application of theory over reality conveniently reduces the headline inflation number called CPIH.

As ever there are regional differences in house price growth.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%)….London’s average house prices hit a record high of £496,000 in September 2020.

Comment

Next week we will get the result of the official attempt to misrepresent inflation in the UK. All inflation measures have strengths and weaknesses but the UK establishment is trying to replace what is a strong measure (RPI) with a poor one ( CPIH). I think it is particularly insidious to keep the name RPI but in reality to make it a CPIH clone. A group that will be heavily affected is first time buyers of property who will be told there is little inflation because of a theoretical manipulation involving imputed rents but face a reality of much higher house prices.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” ( Mad Hatter )

If you set out to destroy trust in national statistics then they are on the right road.

25 thoughts on “The UK Plan is to turn a good inflation measure (RPI) into a bad one ( CPIH)

  1. Inflation starting to rise and wage cuts reducing spending power!

    Not a good outlook!

    The good news is the £ remaining quite strong the last month or so which should reduce imported goods at lower cost to the consumer.

    Swings and roundabouts at the moment and its still difficult to forecast how things will pan out from here.

    The market in the UK has bounced back quite a lot lately mainly due to the various vaccine announcements, whether I happen to think its bounced too much lately on so much uncertainty but there we are the market does look forward.

    • Hi Chris

      There are 2 bits of law around here.
      1.There are 4 Gilts left which owners can have redeemed if they feel there is a major change in the RPI. This is the reason implementation looks set to be delayed to 2030
      2 Different schemes define inflation and indexation in different ways.So it has turned out to be very important how things were written back in the day and some owe the legal people a beer and others something less pleasant.

      The issues are being raised by pension funds.

  2. hello shaun,

    re: “If you set out to destroy trust in national statistics then they are on the right road.”

    all par for the course I’m afraid

    you see , four legs good, two legs better !

    and don’t forget your weekly chocolate ration has been increased from 4 oz to 2 oz .

    Forbin,

    PS: could we vote for a better parlement ? naw , who yer kidding ! both sides of the same coin

    • Hi Forbin

      This is an establishment thing which isn’t politically driven. I do not see any party standing against this move although a lot of that may well be because they do not know about it. Although some better politicians might actually take an interest in such matters….

  3. As usual, Shaun, you are putting your finger on an issue ignored by most commentators. However, I feel that all inflation measures, because they are based on “average baskets”, claim spurious accuracy if they are meant to represent a change in the cost of living. When I think of my older friends’ spending (low or no mortgage or rent, low electronics spend, high-expense holidays, at least before Covid, relatively small eating out) and compare it to those I know in their 20s (exorbitant rents, travel costs, no foreign holidays, lots of gadgets, eat out/coffee shops all the time), I am not really sure what the rate is meant to indicate, except in extremely broad terms (I can remember inflation of over 20% and everyone could tell that prices were rising) and why its last decimal place means anything.
    Again, back in the olden days, high inflation was the precursor to higher interest rates (to choke off demand was the phrase used), but no-one seems to think in those terms any more, as interest rates are not allowed to rise anywhere.
    So, I would doubt whether any of these measures should really be treated as perfect and, in any case, don’t seem to lead to any policy shifts…

    • Which bar of chocolate do they place in a basket, one from MARKS or one from ALDI?

      The basket has always puzzled me as to where they get the basket of goods from and how they change the basket of goods.

      Any thoughts anyone?

      Or does the ONS gather a large basket of chocolate bars from a group of retailers then seek the average price?

      Whatever method they use cannot be accurate it will only give a rough average of how much consumers spend in the average basket.

      • The other one that fools me is how do they treat a computer which is priced the same as last year but has double the power. Or a car which now includes air con as standard, but the previous model didn’t? Or, in fact, the price of almost anything where technology has changed its performance?

        • The other one that fools me is how do they treat a computer which is priced the same as last year but has double the power. Or a car which now includes air con as standard, but the previous model didn’t? Or, in fact, the price of almost anything where technology has changed its performance?
          _______
          Remove them from the core basket & instead use non technology products, like food shelter power & clothing.
          Do not use “unit” type measurements unless they are overwhelmingly commonsense, use the same as supermarkets do for food = the £/100g unit

        • computer use is , I beleive , the one main reason for the growth in the USA of recent years. They use a figure that twice the ” power” means twice as good but I don’t see it that way , You dont use twice the power say to travel at 30mph with either a 150bhp car or a 300bhp one . Same for this laptop , 4 cores , but for most of my computing its making 2 sleep, I seem to rearly use the 4 cpu except when gaming …… and that is apparently productive !!! hahaha

          So I think the figures are all fingers in the air by non technical people who’s remit is to ” make things look good ” for the curent HMG.

          oh well

          Forbin

        • Yes or PG tips with 50% free or a bar of chocolate the bar reduced in size. Then a muesli which has been improved with more fruit added.

          As for the computers and cars they are improving all the time as TV’s are. They may be the same price but smart TV’s getting ever smarter more functions added with different models.

          In actual fact the same differentials can occur in clothes, you go to a different manufacturer and even the same manufacturer and you reduce the stitch count to save costs, price the garments the same but the garment only last half the time of the old garment as it wears out quicker.

          Using the above as an example your basket price should have doubled if one calculated how long the garment lasted.

          This is how MARKS cut costs when they first offshored and the quality of the garments ended up a a poorer quality.

          You can buy cheap washing up liquid but it may be half the strength of Fairy Liquid and works out dearer in the long run as it doesn’t wash the amount of plates.

          I think Shaun needs to look into this one ?

          At the end of the day like most data released by the ONS the British public are always sceptical about the data published.

          • With modern tv’s opportunities for spying, I’m surprised they don’t give them away.

        • The ONS is pretty open about its methodologies (like them or loathe them) for how baskets are chosen and how hedonic adjustments are made for technological improvements. Pretty heavy reading but I found it accessible – the basic ideas are taught on (most? some? not sure) econ and stats degrees, but the specifics obviously vary in implementation from one national agency to another.

          https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukconsumerpriceinflationbasketofgoodsandservices/2020

          https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpricesindicestechnicalmanual2019

          • Sorry, MyBurningEars, I replied to Peter before reading your own reply. I completely agree with you. The ONS is pretty open about its methods and it is probably better and more scientific than most national statistical institutes in its price sampling. However, the US Bureau of Labor Statistics is still likely to be the gold standard when it comes to scientific sampling for consumer prices. It would be tough for another agency to match what it does.

      • Peter, I think the answer to your chocolate bar question would be that it would likely be both MARKS and ALDI, or at least it certainly could be either. If you look at section 7.3 of the Consumer Price Indices Technical Manual on central shop weights, it looks like the prices would be centrally collected and then replicated as many times as needed so that a chain store would get the weight in an elementary aggregate for a location that it should have. These elementary aggregates are supposed to give each price series the same weight, but by replicating quotes for chain stores they can be much like weighted average indexes. The sampling of outlets in the UK consumer price series is actually quite impressive, using simple random sampling (SRS) or probability proportional to size (PPS) sampling to choose most outlets for pricing. The importance of an outlet for PPS sampling seems to depend on employment data more often than sales, but the employment numbers may be a reasonable proxy for sales. There is nothing nearly so sophisticated in Canada for most commodities, or at least there wasn’t eight years ago when I was involved. Most outlets for most commodities were chosen judgmentally. Statistics Canada talked a good game about how scientific our sampling procedures were, but they weren’t really.

  4. Hi Shaun,

    I’ve just read this. Its not as if we didn’t know it. But now its out:

    ‘Savers could be charged negative interest rates in future if the Bank of England successfully establishes a widely used digital currency, according to its chief economist.
    Andy Haldane said central banks’ inability to effectively take rates below zero risks harming the economy by keeping the rate of interest too high, and so it could be useful to find a new way to further loosen.
    There is a risk that people would hoard cash to avoid a negative interest rate on savings in banks. If a digital currency was issued, that would be harder to avoid”

    The boe, determined to make the majority poorer.

    • The mask slips.
      You will become poorer if we say so.
      You are not to be allowed any escape from our economic decrees, no security.
      Saving outwith banks is a sin that must stop, it’s not a freedom, it’s an abuse.
      Get up to your arse in debt, because you will be a slave either way.
      Andy Haldane is an enemy of the people.

  5. Just found this blog. Good stuff, and thanks.

    I have another stats question. Will the ONS still be using the ESA methodology for calculating GDP or will Brexit mean Simply reverting to the SNA of the IMF? Thanks

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