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.
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?