Victory on the UK Retail Price Index ! And it feels good!

I am pleased to report that today’s update will be very upbeat and will contain sections which I hoped to be able to write but felt were certainly far from favourite to take place. Regular readers will be aware that the subject of inflation is a specialist subject for me and a sub-section is the official attempts to “improve” ( in my financial lexicon such an “improvement” equals a lower number). Accordingly when the National Statistician decided to have a consultation to “improve” the UK Retail Price Index I feared the worst. However I hoped and worked for the best as I not only attended the public meeting and explained my view but responded to the consultation both in my own name and as part of the RPI CPI User Group at the Royal Statistical Society.

What happened this morning?

The UK National Statistician Jil Matheson made the following announcement at 7am today.

In developing her recommendations the National Statistician also noted that there is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.

I am pleased with this as continuity and credibility of the numbers,figures and statistics matters and I  had made this point to her in writing. The RPI CPI User Group response had put it particularly well I thought.

Understanding and faith in published statistics are incredibly important as is the long historical record that the RPI represents

You may note that the National Statistician’s actual statement is somewhat mealy mouthed and you would be right! It was quite plain from the beginning that there was an official consensus to try to lower and debase the RPI. However she found herself having to add this to her response which matters to statisticians.

 the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged.

Although she was unable to resist a little dig at this turn of fortune.

while the arithmetic formulation would not be chosen were ONS constructing a new price index

Has the National Statistician not recommended a change?

If you read her response you might think so from the opening section which tells us this.

the formula used to produce the RPI does not meet international standards and recommended that a new index be published

You may immediately note that “international standards” and right are by no means necessarily the same thing. After all benefits claimants in the United States will soon be ruing the impact of the chain-linked inflation measure which is their latest “improvement”.

But we will get a new inflation measure to cover up the official embarrassment at not being able to push through the changes that they wanted and here are the details.

Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

Okay why do we need another new measure?

This is the view of the National Statistician.

The ONS research programme found that use of the arithmetic formulation (known as the ‘Carli’ index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI, and that this formulation does not meet urrent international standards.

That is open to some debate and I will return to this issue in a moment but first here is a change.

Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ

So we are retaining RPI but we need a new measure too giving us inflation in inflation measures. Oh dear.

We are being misled again

The official view has been that the Carli index used in the RPI is flawed and that the Jevons index used in CPI is not. They claim that “statistical experts” are on their side but seem to omit that the Royal Statistical Society in its official response told them this and the emphasis is mine.

However it is clear to us from the work carried out so far that the accuracy of both the CPI and the RPI could be improved by implementing the results of the research programme and that changing the RPI now to bring in onto a par with the CPI would be premature.

This is an important point which the official view has tried to brush over in the debate which is that there are well-founded doubts about both CPI and Jevons too. It is a matter for their conscience why they have ignored this. You may have read about the “formula gap” which has been estimated to add circa 0.9% to RPI if you take their view. Again let me quote from the Royal Statistical Society.

Once all the research, including the need for more homogeneous elementary aggregates is completed, the remaining formula gap is likely to be considerably smaller. The choice of formula is then by definition less contentious.

You may have spotted that for them the formula gap may be much smaller than claimed. This reinforces a point made powerfully at the public consultation in London. From my Notayesmanseconomics blog of the 29th of October 2012.

 A very powerful intervention came from a gentleman who quoted the Office for National Statistics own 2010 technical manual.The emphasis is mine.

In the case of AR (using an arithmetic mean), it can be shown that in certain circumstances its use, when combined with chain-linking of the within-year indices, introduces a small upward bias in the overall price index. This phenomenon is known as ‘price bounce’ or ‘formula bias’.

This was powerful because in the context of that document a small upward bias would be 0.1% and now suddenly we were supposed to believe two years later that it was 0.9%. So what about the other 0.8%?

Is 0.9% the new 0.1%?

Something of a flaw you might think to have your own technical manual quoted at you!

Indeed the RPI CPI User Group response put the issue of the consequences of cherry picking at the facts very powerfully.

the credibility of the RPI (and CPI) depends on convincing users that the concepts and methods have been agreed in a full and fair process of consultation. CPAC appears to have given undue weight to positions that … lack empirical support

CPAC is another Quango which has appeared on the scene and is the Consumer Prices Advisory Committee and they were pushing for RPI to be changed in a downwards direction.

Comment

This whole process always had something strange and odd about it in my view as I pointed out on October 29th.

If you had left the meeting and gone out into the street and asked people what inflation was you would be likely to get a range of views above all the current inflation measures. It is therefore odd I pointed out that we are only reviewing the measure which tends to give the highest reading! After all on such analysis it looks the most accurate.

Let me back this up with the latest survey on inflation from the Bank of England which for obvious reasons has an interest in the numbers being as low as possible.

Question 1:  Asked to give the current rate of inflation, respondents gave a median answer of 4.4%, compared with 4.1% in August.

So if individuals think that inflation is higher than any of our measures why are we “improving” the one which gets nearest to this number?. Surely you should start at the other end of the spectrum?

This entry was posted in General Economics, Gilts, Inflation, Pensions, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues, Uncategorized and tagged , , . Bookmark the permalink.
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  • Chris Rick

    I watched the announcement on breakfast tv. The Moneybox guy gave a lightweight description. The lady anchor declared the RPI not RIP. However I have barely been able to concentrate this morning waiting for your blog. As usual well worth the wait.

  • http://www.facebook.com/TheRealFinney Andrew Finney

    Possible candidate for the financial lexicon spotted today: The Daily Mail’s graphic on M&S’s results “food sales were strong, up 0.3%”

  • anteos

    well done shaun. Unbelievable spin from the beeb and press about how this is a bad thing. Rewarding bankers, investors and pensioners etc.

  • JW

    Hi Shaun

    Congratulations in playing your part in producing this decision.

    I know you wont need me to say how necessary it will be to maintain vigilance. The statement this morning uses the words ‘without major change’. So change there will still be, I read of revised ‘rental costs’ for instance. But the major threat is increased use of hedonic adjustments. This has been brought to almost an art form in the construct of the US CPI, and we should expect pressure for more of the same here. Political pressure to message the numbers down will not abate I fear.
    A need for a UK version of ShadowStats is ever more required.

  • DaveS

    I told my wife at breakfast that Shaun won – we have lots of indexed linked investments so excellent result for us.

    I would bet there won’t be any new index linked Gilts for quite a while – at the moment they aren’t issuing any more index linked Certificates – but they are rolling existing ones – wonder how much longer that will last.

    Shaun, what about the GDP Deflator – doesn’t often get much publicity which I suspect means its open to lots of manipulation. Did they switch it from RPI type methodology to CPI methodology ? So much discussion is focused on GDP but it seems not enough on how its calculated….

  • DaveS

    I never realised quite what a propaganda machine the BBC is – the spin from Stephanie is disgraceful.

    “Britain’s Office for National Statistics has decided, when it comes to inflation, it’s better to be consistent than to be right”

    Perhaps its getting worse, presumably the constant threat of removing licence fees and more recently the Saville scandal etc. keeps the BBC at heel.

  • Anonymous

    Well done Shaun! You have seen the Artful Dodger off this time. Keep vigilant though, because like Fagin’s gang they will not give up trying to pick our pockets.

  • Drf

    Hi Shaun, “So if individuals think that inflation is higher than any of our
    measures why are we “improving” the one which gets nearest to this
    number?. Surely you should start at the other end of the spectrum?” Yes of course. It is good that you attempted to support reason in your representations to the ONS, but of course the realistic amongst us now accept that it is the inverse of rational reasoning which counts in economics and politics today, and is overwhelming all rational sense. It is now clear that even the ONS balked at blatantly revising the RPI index in a manner which was clearly manipulative. So their fall-back strategy now is to generate a new index, which is more or less the same as they intended for the changes to RPI, but eventually shied away from. The government clearly wants this and so after a period considered to be sufficient to distance this debacle from the reality, there will be a sudden change to using this new measure (to engineer a “fall” in inflation!)

    After all, the government has already moved many pensions and other parameters to be measured against CPI, which we well know is a manipulated measure to “reduce” inflation! There is no end to these high-level confidence tricks. Indeed on the Keiser Report broadcast today some of the inevitable additional tricks which governments will use in the future to attempt to deceive and conceal their economic failures were raised, predicted and discussed. The truth is that one cannot believe any statistical data published under the auspices of governments any longer. This is a real problem for the few honest economists now left. What we need is a new completely independent neutral body to collect these data and compile real numbers. Perhaps it should be a sub-division of the Institute of Statisticians, maintained neutral from the politicians. Come to think of it, we also need a new Central Bank set up on a similar truly independent basis?

  • tryingto?

    As someone who, like you, wrote to the ONS to challenge the arguments for change , I share your slightly surprised pleasure at today’s news.

  • Rods

    Hi Shaun,

    I’m very surprised by this victory, but also very pleased with result. You know that I like to be quite vocal on attempted government deception and how it affects us.

    A very well done to you sir and all of your admirable efforts to keep the RPI largely intact. It just goes to show that an individual or small number of people can make a massive difference to the complete population of a country.

    The cynic in me thinks that RPIJ has been created as the new RPI and if it consistently gives ‘the right answer’ then the old RPI will be sidelined overtime with all new inflation linked gilts being CPI or more likely RPIJ linked along with all other measures that cost the UK Government money.

    Once all of the current RPI Gilts have matured or been bought in further rounds of currency debasement, sorry QE, so there is no risk of Gilt holders suing the Government or any further damage to the Government’s reputation (what reputation you may ask) then my money is on RPI being dropped or RPIJ will become the new RPI in the best traditions of Sir Humphrey Appleby. You have won a very significant battle, but have you won the war?

    Unfortunately, this does nothing to solve the poor economic and getting worse by the day financial position of the UK. Each day takes us nearer to the day of reckoning and a major UK Sterling crisis. I see several financial commentators and bank’s 2013 assessments have suggested some of the potential risks. Unfortunately, most economists seem to be unduly optimistic with few calling the real depth of the 2007-08 recession and widely overstating growth since then. Once economic battalions of woes catch up with us, then I fear things will be much worse than expected again. This has already started with UK Gilts now edging up higher than those of France.

  • WilliamOne

    Hi Shaun and congratulations. Would it be fair to draw the conclusion that they’ve separated off the index linked stuff that would have given them problems from a legal standpoint and in doing so it allows them to bring in their new inflation measure that will magically show inflation lower than it otherwise would be?

  • http://www.facebook.com/people/Andrew-Baldwin/100000294792043 Andrew Baldwin

    Thank you for your dogged pursuit of this issue, Shaun,
    which does you great credit.

    You may be interested in knowing that Statistics Canada also
    jettisoned the Carli formula for the Jevons formula, but in two steps. With the
    update of the CPI basket to 1974 expenditures with the publication of October 1978 estimates, the Jevons formula was ditched for the Dutot formula. Then with the update of the CPI basket to 1992 expenditures with the January 1995 publication, the Dutot formula was dumped for the Jevons formula, except for the CPI rent component, which simply seems to have been overlooked.

    There was never any thought of producing a CPID in tandem
    with the official CPI in 1978, or any idea of producing a special CPIJ in 1995.
    The old formula just replaced the new one in the official CPI. The UK isn’t my
    country, and I am a little vague on the rules regarding upratings of gilts or
    so forth that might make it prudent or even legally required to produce an RPI and an RPIJ in tandem. However, this should absolutely be an interim measure, to be continued for the shortest time feasible, after which the RPIJ series should just become the successor to the RPI.

    The official statement from the National Statistician was a little skimpy on detail. The CPI makes considerable (likely excessive) use of the Dutot formula, as well as the Jevons formula. I wonder if all of the formula changes between RPI and RPIJ would be switches from use of the Carli
    formula to the Jevons formula as the naming convention implies or if some
    switches were made to the Dutot formula or something else as well. I hope that the ONS provides some more details, ASAP.

    The differences in outcomes between using the Jevons as
    opposed to the Dutot formula are miniscule compared to the differences between using the Jevons as opposed to the Carli formula, but they aren’t entirely negligible. At least one of the ONS documents said that moving to more homogeneous price samples would allow increased use of the Dutot formua. Anyone who believes the ONS could deliver both homogeneous price samples, and properly representative consumer price indexes at a reasonable cost believes in the Easter bunny. And even in such a world, the Dutot formula still has the not inconsiderable drawback that it could not calculate an index for, say, Grade A Bartlett pears, if some outlets price by weight and others by unit, without making some arbitrary adjustment.

    I feel your pain when you ask why the ONS is making an
    adjustment to make inflation look lower when people think it is actually higher
    than what the official RPI indicates. Just the same, I think the ONS was
    absolutely correct to make this a priority. And their next priority should
    probably be to calculate an annually linked variant of the RPI with a
    superlative (Fisher?) or quasi-superlative (Edgeworth-Marshall) formula, which would also bring the inflation rate down, not up. There may well be serious upward biases in some parts of the RPI, but I doubt very much that they are systemic, or easily corrected.

  • forbin

    Hello DaveS

    I think the BBC has been getting worse – since Hutton maybe

    refer to them as MiniTru these days !

    :-)

    Forbin

  • forbin

    Hello Shaun

    Thanks for standing up – but I doubt it will achieve much in the medium term. The spin doctors and Gerry Mandering will go into full swing to “discredit” RPI now

    The Gov. needs to lower the inflation figures and will do so by hook or crook

    The Creative Price Index will fade and be replace by Rubbish Price Index – Jerry Manders style ( Jevons as in Jevon’s paradox )

    Hopeless !

    In other news Greece continues its nose dive as its unemployment figures continue to increase to “only”

    26.8% – predicted to rise to 30%

    Why are their politicos so enthralled to the Euro ?

    Forbin

  • Anonymous

    Hi Shaun.

    A good result – well done for your contribution.

  • Anonymous

    Hi Guys

    I did comment on the Stephanomics blog and last time I looked it was the 3rd highest in terms of recommendations. I too felt that it was very one-sided. Mind you if someone with Stephanie Flanders connections can consider herself an “outsider” I think we get a clue as to the level of reality being displayed here!

  • Anonymous

    Hi JW
    Thank you and in reply to your suggestion tonights Financial Times editorial is already wailing and gnashing its teeth! I have already commented online pointing out that they have only put one side of the argument as there are issues with the CPI too which they have (conveniently) ignored.
    The rental costs issue is a by-product of the shambles that is or rather will be CPIH……..

  • Anonymous

    Hi Dave

    Yes they did and I covered it a while back when I returned to my old blog site for a bit.

    http://notayesmanseconomics.wordpress.com/2012/10/25/why-was-the-calculation-of-uk-gdp-changed-lower-recorded-inflation-so-higher-growth/

  • Anonymous

    Hi Andrew and thanks
    I can answer your Gilt question which is that 8 index-linked Gilt stocks have in their prospectus that should there be a fundamental change to the RPI that they were entitled to the cash value. This really opens a can of worms with them so much over par and some of that reflecting future expectations which no longer exist. Oh and they needed the Bank of England to approve. Good luck with that legal mess and I can hear lawyers rubbing their hands in hope!
    I do not disagree that our measurement of inflation needs a refresh but we first need to ask what we want to measure and they set out to do it across all our measures and not just cherry-pick one which “just by chance” happens to give the highest number. One suggestion at the consultation was that of the 0.9% gap some 0.4% might be gained by lower RPI but 0.5% gained by higher CPI….. In there was a proposal which faced up to more than just one issue.
    Thanks for the update on Canada’s situation so in this respect you have taken the lead. Do yo have anybody compiling a type of Shadowstats over there?

  • Anonymous

    Hi William and thanks
    I think that our authorities felt that they have committed themselves so much that they needed a facesaving move which is RPIJ. You never know firms issuing annuties and other index-linked deals might try to use it as it would be cheaper for them so it many catch on if customers do not spot this ruse.

  • Anonymous

    Hi tryingto and welcome to my part of the blogosphere.
    May I ask on what grounds you responded?

  • Anonymous

    Hi Rods
    As I have already replied to JW the editorial of the FT is already arguing against this so the vested interests response has begun. Didnt take long did it? I have already replied to them asking why they have ignored the other side of the debate and treated it as if it does not exist.

  • Anonymous

    Hi Drf
    All any of us can do is argue as best we can for what we believe to be right.

  • Anonymous

    :)

  • Anonymous

    Thanks and you are right like the terminator they will be back…

  • ninoinoz

    Outsider? Is that from your financial lexicon, again?

    Perhaps she is an outsider in the sense that she hasn’t, er, had a relationship with two members of the current cabinet!

  • Frustrated economist

    Shaun, I see you quoting the RSS – you do realise the RSS response to the consultation tacitly accepted that the RPI was more out of line than the CPI? They suggested various changes to price collection which would narrow the gap (but 2/3 of the adjustment would be RPI down, 1/3 CPI up). The RSS view was more that the change was rushed and should only be considered once other avenues had been exhausted (and other aspects of price collection improved).

    The International Statistical Community (see Andrew Baldwin’s comment) really do think the Carli is rubbish (no-one else uses it). The IFS produced a paper saying, on balance, the CPI is better. The ONS clearly think so as well.

    Allowing people to keep what they were promised seems reasonable, but lets not keep up the pretence there is nothing wrong with the RPI. The CPI is not perfect, no inflation index ever will be, but it is better. The RPIJ will also be better.

  • http://www.mindfulmoney.co.uk/wp/shaun-richards/spain-has-a-real-economy-that-is-sinking-whilst-her-financial-markets-boom/ Spain has a real economy that is sinking whilst her financial markets boom | Mindful Money
  • Anonymous

    Hi Frustrated economist and welcome to my part of the blogosphere

    This whole debate has got somewhat polarised but you may note that whilst Andrew Baldwin differs with me on some points he also praised me. If I may address your points by quoting from my October Notayesmanseconomics article on this subject I hope it will be clearer.

    “The section I have highlighted is important as I am sure it seems odd to you that if you have a difference between two measures you only review one of them! There has been something of a public relations push from the Office for National Statistics and the National Statistician to attack the Carli index used as a 27% component of the RPI but it seems to have slipped their mind that there are also doubts about the Jeevons index which represents some 63% of the CPI. We should
    be aiming to do what the Royal Statistical Society suggest below.

    the work on the formula effect continues so that ultimately we do arrive at the best possible conclusion for both indices.

    Note the “both” not just the one which tends to give the higher inflation
    reading.”

    Tucked in there is my argument which is that we need a review of our inflation system because there are flaws but we should do so for all of it and not sweep the problems with CPI under the carpet. Just to be clear by saying both I agree that RPI does need looking at but in a full review not a partial one-eyed way.

    I hope that this clears up the position. You may also like to read my analysis of what happened with CPIH…..

  • http://www.mindfulmoney.co.uk/wp/shaun-richards/inflation-inflation-everywhere-and-that-in-the-uk-includes-the-measures/ Inflation Inflation everywhere and that in the UK includes the measures! | Mindful Money