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UK Consumer Price Statistics: A Review Paul Johnson January 2015.

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UK Consumer Price Statistics: A Review Paul Johnson January 2015
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Page 1: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

UK Consumer Price Statistics: A Review

Paul JohnsonJanuary 2015

Page 2: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Terms of reference• Recommend a framework of consumer price indices that will best meet

the needs of users

• Promote statistical standards

• Consider the Cost of Living Index concept

• Consider different sources of data

• Work with the findings of the Smith Review of Governance

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Page 3: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Two big ambitions

• To try to provide some clarity over what consumer price statistics are

for, and what user needs are

– What should we be measuring?

• Review a whole range of methodological issues including data

sources, how quality is adjusted for, the treatment of discounts

– How should we be measuring?

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Page 4: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

In context of main uses

• Compensation index

• Inflation targeting

• Deflator

• Information

• And crucially use in contracts, including gilts, which means that

stability is important

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Page 5: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

What should we be measuring?

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Page 6: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Four main measures of inflation

• CPI: National statistic, method set by Eurostat to ensure EU

wide comparability

• CPIH: As CPI, but includes owner occupiers housing costs on

rental equivalence basis. It currently has its national statistics

status suspended

• RPI: Longest running measure, no longer a national statistic

• RPIJ: As RPI but with “corrected” formula for aggregation at the

most basic level

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Page 7: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

They paint very different pictures

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Page 8: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

For example over real level of median earnings

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Page 9: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

The future of the RPI

• RPI lost national statistics status in 2013

– The use of the “Carli” (arithmetic average) at the elementary aggregation stage creates an

upward bias

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Page 10: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

The difference the Carli makes

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Page 11: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

• Government and others should stop using RPI wherever

possible

• UKSA should speak out against its use

• Should continue to be produced only as a legacy index

supporting existing contracts, with no changes to methodology

– In the long run UKSA should look to find ways to discontinue

production

Recommendations

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Page 12: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Different definitions of inflation

• The increase in prices between period 1 and period 2 (suitably

weighted to reflect consumption of different goods and services)– Broadly what CPIH does

• The increase in the actual cash outlay required by households to

achieve the same consumption between periods 1 and 2 – what

some have referred to as a “household index”

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Page 13: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

The household index

• Would differ from CPIH by, for example, including actual spending on mortgage interest

and gross (as opposed to net) insurance premia

• Would not be a coherent population wide measure of “prices”

– Which may explain why we have been unable to find any example internationally of such an

index

• But there is an important issue – different types of households face different changes in

the costs they face

– And a “household index” may be more coherent when applied to sub-groups

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Page 14: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Different households have faced very different inflation rates

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Page 15: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Recommendations

• ONS should move towards making CPIH its main measure of

inflation.

– CPIH should probably include Council tax

– Consider legislation governing the production of CPIH

• ONS should develop an annual publication showing inflation as

experienced by a range of different household types, along with

appropriate advice on what income measures these indices can

be compared to.

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Page 16: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Different definitions of inflation

• The increase in prices between period 1 and period 2 (suitably

weighted to reflect consumption of different goods and services)– Broadly what CPIH does

• The increase in the actual cash outlay required by households to

achieve the same consumption between periods 1 and 2 – what

some have referred to as a “household index”

• The increase in spending required to achieve the same level of

welfare in period 2 as in period 1, in the face of rising prices– A Cost of Living Index

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Page 17: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

The Cost of Living Index

• Economically speaking CPI, RPI etc are not COLIs

– They do not take account of substitution to cheaper goods

• A genuine COLI is very hard to estimate

– And certainly can’t be done in a timely manner

• But approximations are possible and initial work suggests that there is a strong case for

pursuing work in this area

– There might be quite significant differences between a COLI and current measures

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Page 18: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Difference between CPI and one approximation of a Cost of Living Index

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Page 19: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Recommendations

• ONS should continue work on the COLI (superlative indices) and

aim to produce annual estimates.

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Page 20: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

How should we be measuring?

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Page 21: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Recommendations

• Data sources – ONS needs to make progress in using scanner and web data

– The source of much weights data – the Living Costs and Food Survey – needs reviewing

• Quality change needs monitoring– It is very striking how much difference it makes

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Page 22: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Prices and price index for vacuum cleaners

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Page 23: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

Recommendations

• Data sources – ONS needs to make progress in using scanner and web data – The source of much weights data – the Living Costs and Food Survey –

needs reviewing

• Quality change needs monitoring– It is very striking how much difference it makes

• The issue of outlet substitution should be considered

• More discounts should be included in inflation statistics– Most (e.g. buy one get one free) are currently excluded

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Page 24: UK Consumer Price Statistics: A Review Paul Johnson January 2015.

UK Consumer Price Statistics: A Review

Paul JohnsonJanuary 2015


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