RPI-CPI USER GROUP TOWARDS A HOUSEHOLD INFLATION INDEX John Astin & Jill Leyland London, Public Meeting, 13 July 2015.

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Presentation transcript:

RPI-CPI USER GROUP TOWARDS A HOUSEHOLD INFLATION INDEX John Astin & Jill Leyland London, Public Meeting, 13 July 2015

RPI-CPI USER GROUP EXPENDITURE–WEIGHTED “Plutocratic” HOUSEHOLD–WEIGHTED “Democratic”

RPI-CPI USER GROUP DIFFERENCE BETWEEN THE TWO APPROACHES EXPENDITURE WEIGHTS: Effectively weights each household according to its total expenditure. (e.g. more weight to “luxury” products) HOUSEHOLD WEIGHTS: All households have equal weights (consumption pattern of typical household)

RPI-CPI USER GROUP CURRENT MAIN INDICES CPI: EXPENDITURE-WEIGHTED (correct for a macroeconomic index) RPI: CLOSE TO HOUSEHOLD-WEIGHTED (trimmed income distribution)

RPI-CPI USER GROUP WHY HII HOUSEHOLD–WEIGHTED? HII SHOULD RELATE TO INFLATION EXPERIENCED BY TYPICAL (MODAL) HOUSEHOLDS Middle of income/expenditure distribution

Example of difference RICH POOR ALL PlutoDemo AveTotAve TotAve TotAve exp wts exp wts exp Wts £000 % % % FOOD , HOUSING , DURABLES , TOTAL

RPI-CPI USER GROUP MORTGAGE INTEREST PAYMENTS (MIPs) Included in RPI Probable reason for continued popularity Not in CPI – correct for a macroeconomic index

RPI-CPI USER GROUP MIPs Major item of household outgoings Difficult or impossible to substitute Exclusion from inflation index unacceptable to public Advantage: takes account of house price levels AND interest rates

RPI-CPI USER GROUP COUNTER–ARGUMENTS MIPs – neither goods nor services MIPs are “transfer payments” not “expenditures” In National Accounts Thus: MIPs correctly excluded from CPI – a macroeconomic index

RPI-CPI USER GROUP OTHER TYPES OF INTEREST If MIPs included in HII it is logical to include other types of interest

RPI-CPI USER GROUP EXAMPLE OF LOANS FOR: - Cars and other durables - School fees - Weddings - Holidays - Student loans - Payday loans (“fees”)

RPI-CPI USER GROUP INCLUSION OF LOAN INTEREST WOULD ADD TO PUBLIC ACCEPTABILITY OF HII

RPI-CPI USER GROUP NON-LIFE INSURANCE Purpose of insurance: protection against relatively rare but potentially expensive events. Majority of households pay premiums for many years without making a claim. PREMIUMS ARE A SIGNIFICANT ITEM OF HOUSEHOLD EXPENDITURE AND SHOULD BE IN AN INFLATION INDEX.

RPI-CPI USER GROUP INSURANCE IN CPI CPI – a macroeconomic index – treats insurance, correctly, in a way appropriate to National Accounts conventions. Gross premiums are what households pay. Margins are amounts retained by companies for provisions, management costs and profits. Net premiums are the balances paid out in claims. CPI treats net premiums as intra-household transfers. Only “margins” are included in the CPI.

RPI-CPI USER GROUP Households do not think like national accountants! They pay premiums for PEACE OF MIND. Santander Peace of Mind Home insurance policy summary

RPI-CPI USER GROUP GROSS PREMIUMS are what households actually pay. No financial benefit from making a claim, except the household is relieved from paying all or part of the car repair, medical operation etc.

RPI-CPI USER GROUP PRICE MEASUREMENT CPI treatment a compromise: price of service charges can’t be measured, so gross premiums are used as proxy (“gross/net” approach). HII treatment – simpler and more correct (“gross/gross” approach).