In the midst of all the market turmoil following Donald Trump’s US election victory last week, the UK’s Office for National Statistics announced an important change in how it publishes inflation numbers – and not everyone is happy.
From March next year, statisticians will drop their focus on the consumer prices index (CPI) in favour of CPIH, which seeks to measure the housing costs of owner-occupiers.
The reason this gets economists hot under the collar is that inflation rates are used to calculate everything from pension payouts and wage deals to rail fare rises.
Statement on the future of consumer price #inflation statistics in the UK https://t.co/esKX9h9yFp
— ONS (@ONS) November 10, 2016
News of the change comes after a rise in inflation the wake of the Brexit vote, stoked by the sharp drop in the pound. As import costs rise and price tussles over household goods like Marmite and Typhoo tea grab the headlines, economists and the Bank of England are warning households to prepare for further increases in inflation, which measures the pace of change in the cost of goods and services.
The latest CPI figure, out on Tuesday, is expected to put inflation at a two-year high of 1.1%.
That backdrop has added to concerns of those who believe CPIH is lacking as a measure. It lost its status as a “national statistic” in 2014 and has yet to regain it.
One of those voicing worries about CPIH is former Bank of England policymaker Andrew Sentance. He sits on the National Statistician’s stakeholder advisory panel on consumer prices but says he was caught out by last week’s announcement.
“My understanding was if there was going to be a change it would take place more gradually,” said Sentance, now a senior economics adviser at PwC. “Not everyone is convinced that CPIH is the right measure and yet the ONS are pressing ahead with it on quite an accelerated time scale.”
Sentance says other economists share his concern that CPIH, by using figures based on rents, does not truthfully capture people’s experience of the housing market.
Another economist opposed to the change is Shaun Richards, who specialises in inflation measurement. He believes the mood on statistics forums online and off has turned against CPIH.
“I was against this from the beginning ... now at discussions on this noone speaks against me. The consensus has swung against CPIH,” he says.
On Monday the UK Statistics Authority, which gives out the national statistic designation, said that its regulatory team was continuing to review evidence provided by the ONS, and to speak with users of inflation statistics and that any decision would be based on the degree to which CPIH met standards of “trustworthiness, quality and value, expected by users”.
Jill Leyland, a fellow of the Royal Statistical Society, is another economist worried that the ONS is shifting its focus to CPIH and not providing the general public with a measure that reflects their experience of inflation – something the retail prices index (RPI) was previously seen to do, although it has also faced criticism for overstating inflation and the way it includes housing costs.
“We are concerned about some ongoing issues with this measure, which were reflected in its de-designation as a national statistic,” said Leyland.
“CPIH, which as a derivative of CPI was primarily designed for macroeconomic purposes, does not give the public a price index which measures the actual impact of inflation on households to replace RPI.”
Sentance feels there is confusion around the UK’s use of different inflation measures for different purposes – the UK still uses the RPI for inflation-linked bonds, for example, but CPI is used to set an inflation target for the Bank of England.
“We seem to be getting ourselves into quite a muddle about which measure of inflation we should focus on,” said Sentance.
But the ONS deputy national statistician responds that it is precisely this “alphabet soup” of inflation measures that supports its move to announce a move to focussing on CPIH.
“From our point of view we want to signal what we think is the best measure,” said Jonathan Athow.
He also rebuffed suggestions the change had been sprung on people and defended the quality of the figures, which took in hundreds of thousands of rental prices. The ONS had been consulting on CPIH for several years, he said. He also defended the measure as reflecting housing costs, without being clouded by changes in house prices – something that would reflect asset prices not goods and services prices.
Athow said CPIH was asking: “What’s the service you are getting from your home in terms of being able to live there.”
“We are certainly not alone in using this among statistics offices around the world. We think it’s the best measure,” he added.
Economist and former BoE policymaker Kate Barker agrees. She chairs the advisory panel on which Sentance sits. “I’ve listened hard to everyone’s views and I support moving things on,” she said on Monday, backing the move to CPIH as something that offers an alternative to RPI and all its shortcomings.
