Consumer Price Statistics Derek Bird Office for National Statistics 1

Topics included in the presentation 1. The Consumer Prices Index & Retail Prices Index 2. Governance Arrangements 3.Forward Work Plan for Consumer Prices 2

1. The Consumer Prices Index & Retail Prices Index 3

1. CPI & RPI – History (1) RPI: ‘ old lady’ of UK inflation measures established in June 1947 although not ‘official’ until January : improvements via recommendations from RPI Advisory Committees –1956: population coverage established –1962: weighting framework should be updated every year via a household budget survey –1971: construction of regional prices feasible but costly and determined should not proceed –1974: measurement of owner-occupied costs changed to Mortgage Interest Payments from rentals equivalence –1995: measurement of house depreciation included 1995 – 2008: improvements agreed via protocols between ONS (UK Statistics Authority), Bank of England & Treasury –2004: move to hedonic regression approach to quality adjustment for certain high-tech goods Since 2009: Consumer Prices Advisory Committee set up to Advise the Authority on improvements –2010: change to Average Effective Rate from Standard Variable Rate in measurement of Mortgage Interest Payments –2011: improved the method used to measure seasonal items in the CPI and RPI –2012: new car measurement harmonised with CPI (tbc) 4

1. CPI & RPI – History (2) CPI: ‘new kid on the block’ - born Jan 1996; key principle international comparability & standards standards of construction and continuous improvement via European legislation –2000: population extended from private households to also include institutional households and visitors to the UK –2001: hospital services and nursing and retirement homes included –2002: financial services expressed as proportion of transaction value included meteoric rise: –developed by EU to assess membership of the European Monetary Union –became ECB’s inflation measure to define/assess price stability in Euro area –since Dec 2003 basis for UK Government’s inflation target –from Apr 11 used in indexation of benefits, tax credits and public service pensions 5

1. CPI & RPI – current practice: coverage, approach & methods TopicCPIRPI Population Base all private & institutional households foreign visitors to the UK excl. top 4% of households by income excl. pensioner households (those who derive three quarters of total income from state benefits) excl institutional households excl. foreign visitors to the UK Commodity Coverage excl. certain housing costs e.g. owner occupied housing, council tax and house depreciation incl. university accommodation fees, foreign students university tuition fees, unit trust & stockbrokers charges incl. housing costs e.g. mortgage interest payments, depreciation, buildings insurance and council tax excl. university accommodation fees, foreign students university tuition fees, unit trust & stockbrokers charges Product Coding standard international classification system consistent with system used by National Accounts long standing system not used except for the RPI Population, Coverage & Classification 6

1. CPI & RPI – current practice: coverage, approach & methods 180,000 individual price quotes each month 680 different products 20,000 shops and service providers + the internet 141 locations around the UK collection from ONS rather than high street for certain products –national pricing policies –non-store collection e.g. football admission prices, domestic gas –internet shopping Data Collection (CPI & RPI) 7

1. CPI & RPI – current practice: coverage, approach & methods exactly the same approach for CPI & RPI each price quote subjected to different validation tests e.g. –month on month movement –variation since base period –minimum & maximum ranges –dispersion for price quotes within a particular item each failure reviewed and decision made on acceptance or rejection decisions on ‘comparability’ reviewed by at least two different quality assurers Quality Assurance & Checking 8

1. CPI & RPI – current practice: coverage, approach & methods TopicCPIRPI Weighting Framework draw on full range of sources from National Accounts Household Budget Survey only Aggregation mainly use geometric mean at first stage of aggregation arithmetic mean at first stage of aggregation Rounding (annual & monthly rates of change) calculated from unpublished, unrounded data calculated from rounded published data Weighting, Aggregation & Rounding 9

1. CPI & RPI – current practice: coverage, approach & methods Pre-release access: –CPI & RPI: 24 hours for Treasury, Bank, BIS & No. 10 –CPI: 3.5 days for MPC when meeting the week prior to publication –CPI: 5pm on Fri prior to publication (Tues) inform Bank & Treasury whether Open Letter protocol triggered Internet publication : –headline publications (statistical bulletin) –detailed data (briefing note) –database for downloading data for further analysis –microdata available –other ONS publications –social media Press conferences: –wire agencies –newspapers Publication 10

1. CPI & RPI – current practice: coverage, approach & methods exactly the same approach for CPI & RPI for standard improvements: –weighting framework completely updated every year –basket of goods and services updated every year –both done to ensure CPI & RPI reflect latest household spending patterns methodological development also implemented e.g. –2010: improved methods for measurement of mortgage interest payments in the RPI –2011: improved measurement method for seasonal items for CPI & RPI Annual Improvements 11

1. CPI & RPI –Uses (1) CPI: macroeconomic indicator –UK Government’s official inflation target –deflation of expenditure and output in the National Accounts international comparison and inflation measurement –used by Eurostat in calculation of European Union inflation –nearly always used when UK inflation compared to other countries income adjustment –indexation of salaries? –indexation of pensions and benefits price adjustment –contract escalation? 12

1. CPI & RPI – Uses (2) RPI: macroeconomic indicator –inflation measure income adjustment –indexation of tax allowances –indexation of salaries –uprating redemption values of certain gilts and national savings certificates price adjustment –contract escalation –price regulation 13

2. Governance 14

2. Responsibilities & Mandates RPI UK Statistics Authority required to produce the RPI under the Statistics and Registration Act, 2007 Responsibility for production delegated to ONS CPI Produced under European regulation (as HICP) 15

2. Consumer Prices Advisory Committee Reason for Creation Statistics and Registration Act 2007 established new RPI governance arrangements RPI methodological changes require approval of UK Statistics Authority prior to referral to the Bank of England If the Bank considers change would be materially detrimental to the interests of the holders of relevant index linked gilts then change cannot be made without consent of the Chancellor the Authority decided to establish a group of experts to advise them intellectual rigour brought to bear on important changes to key economic indicators determination to further improve UK inflation measurement Operational Overview Remit RPI: advise Authority on improvements recommended by the ONS and on methodological issues CPI: advise Authority on improvements that fall outside the European legislative framework 16

2. Consumer Prices Advisory Committee (2) Reporting Policy meeting papers, including a summary note are published on the CPAC webpage following each meeting CPAC produces an annual report for the UK Statistics Authority each September. This contains: –recommendations agreed by the Committee (including improvements to the CPI and RPI) –supporting information and debate on these issues –summary of other topics discussed in the last year –forward work plan for consumer price statistics 17

3. Forward Work Plan for Consumer Prices 18

3. Forward Work Plan for Consumer Prices Top Priorities -inclusion of owner occupiers’ housing costs into an expanded CPI by improving understanding of the reasons for the increase in the ‘formula effect’ for clothing price inflation and making further improvements to the CPI & RPI from 2013 Other issues currently being considered -further developing the strategy for consumer price statistics -measurement of private rents -inclusion of Council Tax in the CPI -review sample selection of locations -review of the optimal base period for the CPI and RPI -temporal sampling 19

Thank You Questions? 20