Shaping the future of consumer price statistics John Pullinger National Statistician
‘If the […] economy was quite static, with very few new products introduced, very little quality improvement in existing products, little change in consumers' income, and very small and infrequent changes in the relative prices of goods and services, measuring changes in the cost of living would be conceptually quite easy and its implementation a matter of technical detail ...’ Boskin Commission final report, Toward A More Accurate Measure Of The Cost Of Living (1996)
What I want to cover… User needs: the 3 cases History up to this point CPIH The new Household Index RPI: our view and its future The landscape of measures
User needs Economic principles Approach consistent with economic concepts and approaches Household experience Looking at price changes as experienced by households Ongoing RPI Existing, long-standing contracts need RPI
Before I begin on the substance… ONS’s role not to prescribe use: Inflation target Uprating of payments Rather to provide a set of measures to meet user need and be of sufficient quality For others to justify use in e.g. uprating
Recent developments Jan ‘13: RPI loses Nat’l Stats badge May ‘13: Paul Johnson begins review Jan ‘15: Johnson review published Late ‘15: Nat. Stat’s consultation on future plans Mar ‘17: Introduce changes Nov ‘16: Nat. Stat. statement on future plans Mar ‘16: Nat. Stat. announces direction of travel
CPI and CPIH CPI measures based on economic principles But CPI lacks key element of consumption – owner-occupiers housing (OOH) CPIH a more comprehensive measure than CPI as includes OOH Will include Council Tax from March 2017 Not constrained by international regulations – CPI is same thing as HICP Not subject to the same legislative constraints as RPI
Between Jan ‘15 & Jan ‘17, CPIH 0.3 pp higher than CPI CPI and CPIH Between Jan ‘15 & Jan ‘17, CPIH 0.3 pp higher than CPI
Different approaches to OOH Therefore what is the best way of incorporating OOH costs Method is widely debated ONS looks at 3 approaches available, measured at 3 different points: Used - rental equivalence Paid - payments approach (experimental) Acquired – net acquisitions (experimental) CPIH uses rental equivalence: valuing ‘housing services’ according to the cost to rent an equivalent property
Why rental equivalence Payments approach Consumer prices index aims to measure consumption, and interest payments represent the cost of borrowing money rather than the cost of consumption Net acquisitions Due to the lack of available data, the methodology used does not separate between the land and house price, and therefore there will be some measure of asset price included. Rental equivalence Measures the consumption of OOH services from an economic perspective
CPIH as National Statistic Lost designation in 2014: problems with how private rents were used in ‘rental equivalence’ Not just about addressing specific problem - wider requirements to get ‘badge’ back: Strengthen QA Better explain methodology Monitor behaviour of index and in particular compare to other data & methods Range of material now published
Effect of different OOH measures
Effect of different OOH measures Per cent CPIH CPI-H (Pay1) CPI-H (Pay 2) CPI-H (NA) 2006 2.4 2.5 2.7 2007 2.9 3.4 2008 3.5 2009 2.0 1.0 -0.4 1.5 2010 3.3 3.2 2011 3.9 4.3 4.2 2012 2.6 2.8 2013 2.3 2014 1.4 1.6 2015 0.4 0.0 0.2 Ave. (2006-15) Ave. (2012-15) 1.3
‘Household’ measure Developing ‘Household Cost Indices’ Asks the question of how households experience change in prices looking at outgoings Look at payments households are making (rather than other ways of measuring prices) Households weighted equally rather than weighting by expenditure Different household types experience of inflation Work to be done, but aim to have first estimates by end of 2017
RPI: our view “the methods used to produce the RPI are not consistent with internationally recognised best practices” (UK Statistics Authority, March 2013) “the RPI is not a good measure of inflation... I strongly discourage the use of RPI…” (National Statistician, March 2016)
Problems with the RPI Use of the ‘Carli’ formula Excludes some households (richest households and the poorest-pensioner households) Housing includes both mortgage interest payments and house prices Legislation limits the scope of the ONS to develop the RPI
But still a need for RPI Used in many long-standing contracts (e.g. gilts) Changes governed by ‘fundamental and detrimental’ tests set in law And therefore we will publish the minimum of RPI-related data necessary …and undertake routine changes (e.g. basket updates) …but we will not ‘invest’ in improving it
Future landscape CPIH CPI RPI ‘House hold Index’ Economic principles Most comprehensive measure CPI Comparable across EU Does not include OOH ‘House hold Index’ Experience of inflation Use and development will depend on final design and properties RPI Legacy measure Use discouraged
Questions? ?