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.
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!
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.
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