Yesterday brought some news which was both intriguing and welcome. It brings into play several of my themes. We have people being both inventive and innovative. Proper research into the consequences of this. Next we have something which I have to confess raises a smile which is economic growth being provided by lower prices. Yes the “DEFLATION” which regularly screams from the pages of the mainstream media as some sort of horror story. Last and definitely least is the way that the UK statistics establishment initially reviewed the work and decided as we often see with Imputed Rent that however the facts change we end up with the same answer as before.
The Telecoms Sector
There had been a longstanding problem here which is summarised below by Diane Coyle.
In the 2017 ESCoE Discussion Paper ‘A Comparison of Approaches to Deflating Telecoms Services Output‘ we explored why the official price index for telecoms had been almost flat during a period when the industry had experienced significant technological change including the advent of broadband data services, and business models, pricing and consumer behaviour also changing substantially.
Pretty much everyone will have seen extraordinary changes and innovation in the telecoms sector over recent years and indeed decades. As someone who paid for AOL Silver with its speed of 125k and then 256k if I remember rightly and now can do Zoom classes in the back garden from the Wi-Fi there has been extraordinary change. The price is about £10 per month more but that is dwarfed enormously by the quantity change. Recording that as unchanged is really rather extraordinary but sadly not unique as for example the way prices are used in the government sector are also often reality free.
Here is the problem.
While data services now represent the primary output of the telecommunications services sector, the existing output deflator used in the UK and elsewhere gives higher weight to traditional voice and text (SMS) services.
Next comes the consequence of the mistake.
Because the price of these traditional services is higher and demonstrated less change, using a deflator weighted towards these items implies slower growth in the real-terms output and productivity of the sector, which seems at odds with the considerable usage growth and experience of service improvements and motivated the consideration of alternatives.
This is an important conceptual issue so let me explain it. Our statisticians get data but it needs a Deflator to allow for any inflation so that we get a real number. When you enquire as to how this works they are often rather evasive. The issue here is that as David Bowie would put it there have been ch-ch-changes but these have not been allowed for. As you can see it is a big deal.
Because, although the component services from text messages and voice calls to WhatsApp messages and video all involve different charges (higher per byte for the ‘traditional’ services), they all use bytes of data carried over the same networks. These two options suggested a price decline of between 37% and 97% over the years 2010 to 2017, rather than the roughly zero change in the published index.
One area of the newer work strikes home with me as someone who chooses the internet provider I have because they offered another attractive deal ( Sky Sports). Others might get a mobile deal but the point is as below.
For instance, fixed line services involve an access charge, currently treated as a separate charge when it would be more reasonable to allocate it across the services provided, as no-one just buys ‘access’. Bundling services has become common: Ofcom has estimated that nearly four fifths of services in the UK are ‘bundles’ of different components.
Many of you will be pleased to read that conventional hedonics have been rejected here.
For instance, many hedonic regressions for broadband use download and upload speeds as the main quality characteristics. However, these regressions rely on the high level tariff, rather than individual contract level data. This means using advertised, rather than actual, speeds since actual speeds can only be observed at the individual contract level.
I am sure I am not the only one who has contacted his provider over internet speeds during this pandemic. Also other factors matter and and led me add reliability which seems to have been missed.
other factors are also important such as coverage and latency (the time-lag between sending and receiving, of little importance on a text or local call, potentially awkward on an international call, potentially catastrophic for a high frequency traders).
In terms of the effect the results have been refined down to this.
Using our preferred option, which may still be characterised by some upward
bias, the price of telecommunication services in the UK declined by 64% from 2010-2017, rather than
remaining broadly flat as suggested by the current deflator. …….. Our new options deliver declines in the deflator series of between 58% and 84% between 2010 and 2017.
There has been a lot discussed here but many of you will be familiar as I covered this when it first appeared.
The analysis in the paper referred too highlights this in one simple section which shows that in the period in question telecoms revenues fell by 10% which in essence led to the falling output and productivity conclusion in UK GDP. But data transmission rose by a factor of ten strongly challenging the falling output conclusion. Another way of looking at that is the existence of a wide range of business and services such as WhatsApp or Kik. ( January 18th 2018)
Let me ram home the productivity point.
Telecoms accounts for only 1.8 per cent of the economy but official data suggest it is responsible for nearly a fifth of the economy-wide productivity slowdown. ( Financial Times)
Both the Financial Times and the Bank of England have been hot on the case of the UK Productivity Gap whereas regular readers will know that I have been more optimistic. The numbers are heading my way. Also both are inflation nutters who will be trying to avoid the intellectual disaster of economic growth coming from lower prices as I regularly argue.Where’s your 2% inflation target now?
Another reason I welcome this is that some of these matters are genuinely difficult as Diane Coyle points out.
The question is how to adequately control for quality change when there is a new or higher quality product, rapid volume growth and declining price substitute for an existing good or service.
It has applied to telecoms but goes much wider.
However, the key point is to be aware of the sensitivity of the price index to the assumptions made about weights.
It applies to fashion clothing and computer games as followers of my work will be aware. These factors have been drivers in the official propaganda campaign against the Retail Price Index yet could be reformed. Somehow that gets “forgotten” as I remind your that owner-occupied housing has a weight of 17% using rents but more like 7% using house prices. I am not sure manipulation could be more transparent.
As a matter of opinion whilst I welcome this work I would apply the lower gains as there are challenges to it. For example I recall the statistician Simon Briscoe pointing out that each I-Pad he buys is much better than the previous one but he only uses some of the gains. But we will be left with higher GDP and productivity and lower inflation. The latter is awkward as it is not revised so we should calculate a new series so the difference can be known,
Finally let me return to the establishment initially rejecting this as some of you may follow social media and note this seemed to be officially denied. Perhaps they have “forgotten” this official letter from January 2018.
As the piece notes, while this improvement may change the relative size of the telecoms industry within our statistics, it will likely have little or no impact on our overall estimate of GDP.
In addition, there is also no direct read across to consumer price indices such as CPI or CPIH, as these indices are produced separately from national accounts deflators of ‘factory gate prices’.
Whereas yesterday we were told.
The effect of the new deflator would increase the volume of output of the telecommunications sector and will likely increase the headline volume measure of GDP.