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Measurement of UK Consumer Price Inflation
A presentation given to the Royal Statistical Society, January 2011
Pam Davies, Darren Morgan & Phil Gooding Office for National Statistics
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Topics included in the presentation
1. History & Background of the CPI & RPI
2. Current Practice: coverage, approach & methods
3. Differences between the CPI & RPI
4. Uses and Users of the CPI & RPI
5. CPI & RPI Governance
6. Future CPI & RPI Work Programme
7. Consultation
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1. History & Background of the CPI & RPI
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1. History & Background of the CPI & RPI
RPI:
• ‘old lady’ of UK inflation measures
• established in June 1947 although not ‘official’ until January 1956
• 1947 - 1994: improvements via recommendations from RPI Advisory Committees
– 1956: population coverage established
– 1962: weighting framework should be updated every year via a household budget survey
– 1971: construction of regional prices feasible but costly and determined should not proceed
– 1974: measurement of owner-occupied costs changed to Mortgage Interest Payments from rentals equivalence
– 1995: measurement of house depreciation included
• 1995 – 2008: improvements agreed via protocols between ONS (UK Statistics Authority), Bank of England
& Treasury
– 2004: move to hedonic regression approach to quality adjustment for certain high-tech goods
• Since 2009: Consumer Prices Advisory Committee set up to Advise the Authority on improvements
– 2010: change to Average Effective Rate from Standard Variable Rate in measurement of Mortgage Interest Payments
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1. History & Background of the CPI & RPI
CPI:
• ‘new kid on the block’ - born Jan 1996; key principle international comparability &
standards
• standards of construction and continuous improvement via European legislation
– 2000: population extended from private households to also include institutional
households and visitors to the UK
– 2001: hospital services and nursing and retirement homes included
– 2002: financial services expressed as proportion of transaction value included
• meteoric rise:
– developed by EU to assess membership of the European Monetary Union
– became ECB’s inflation measure to define/assess price stability in Euro area
– since Dec 2003 basis for UK Government’s inflation target
– from Apr 11 used in indexation of benefits, tax credits and public service pensions
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2. Current Practice: coverage, approach & methods
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2. Current Practice: coverage, approach & methods
Topic CPI RPIPopulation Base
• all private & institutional households
• foreign visitors to the UK
• excl. top 4% of households by income • excl. pensioner households (those who derive three quarters of total income from state benefits)
• excl institutional households
• excl. foreign visitors to the UK
Commodity Coverage
• excl. certain housing costs e.g. owner occupied housing, council tax and house depreciation
• incl. university accommodation fees, foreign students university tuition fees, unit trust & stockbrokers charges
• incl. housing costs e.g. mortgage interest payments, depreciation, buildings insurance and council tax
• excl. university accommodation fees, foreign students university tuition fees, unit trust & stockbrokers charges
Product Coding
• standard international classification system • consistent with system used by National Accounts
• long standing system not used except for the RPI
Population, Coverage & Classification
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2. Current Practice: coverage, approach & methods
• 180,000 individual price quotes each month
• 680 different products
• 20,000 shops and service providers + the internet
• 141 locations around the UK
• collection from ONS rather than high street for certain products– national pricing policies
– non-store collection e.g. football admission prices, domestic gas
– internet shopping
Data Collection (CPI & RPI)
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2. Current Practice: coverage, approach & methods
• exactly the same approach for CPI & RPI
• each price quote subjected to different validation tests e.g.– month on month movement– variation since base period– minimum & maximum ranges– dispersion for price quotes within a particular item
• each failure reviewed and decision made on acceptance or rejection
• decisions on ‘comparability’ reviewed by at least two different quality assurers
Quality Assurance & Checking
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2. Current Practice: coverage, approach & methods
Topic CPI RPIWeighting Framework
• draw on full range of sources from National Accounts
• Household Budget Survey only
Aggregation • mainly use geometric mean at first stage of aggregation
• arithmetic mean at first stage of aggregation
Rounding (annual & monthly rates of change)
• calculated from unpublished, unrounded data
• calculated from rounded published data
Weighting, Aggregation & Rounding
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2. Current Practice: coverage, approach & methods
• Pre-release access: – CPI & RPI: 24 hours for Treasury, Bank, BIS & No. 10
– CPI: 3.5 days for MPC when meeting the week prior to publication
– CPI: 5pm on Fri prior to publication (Tues) inform Bank & Treasury whether Open
Letter protocol triggered
• Internet publication:– headline publications (statistical bulletin, nugget)
– detailed data (detailed briefing, Focus on Consumer Prices)
– database for downloading data for further analysis
– other ONS publications
– social media
• Press conferences:– wire agencies– newspapers
Publication
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2. Current Practice: coverage, approach & methods
• exactly the same approach for CPI & RPI for standard improvements:
– weighting framework completely updated every year
– basket of goods and services updated every year
– both done to ensure CPI & RPI reflect latest household spending patterns
• methodological development also implemented e.g.
– 2010: improved methods for measurement of mortgage interest payments in the RPI
– 2011: improved measurement method for seasonal items for CPI & RPI
Annual Improvements
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3. Differences between the CPI & RPI
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Breakdown of the differences between CPI and RPI
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
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Breakdown of the differences between CPI and RPI
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
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Breakdown of the differences between CPI and RPI
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
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Breakdown of the differences between CPI and RPI
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
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3. Main differences
Topic CPI RPIPopulation Base
• all private & institutional households
• foreign visitors to the UK
• only spending in the UK is covered
• spending data from Household Final Monetary Consumption Expenditure in UK National Accounts
• excludes top 4% of private households by income
• excludes some pensioner households
• excludes institutional households
• excludes foreign visitors to the UK
• includes spending both within UK and abroad by UK households
• spending data from household survey ie ONS’s Living Costs and Food Survey
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3. Main differences
Topic CPI RPICommodity Coverage
• excludes most housing costs e.g. owner occupied housing & council tax
•excludes TV licence, road fund licence
• includes university accommodation fees, foreign students university tuition fees, unit trust & stockbrokers charges
• includes housing costs e.g. mortgage interest payments, depreciation, buildings insurance and council tax
• includes TV licence, road fund licence
• excludes university accommodation fees, foreign students university tuition fees, unit trust & stockbrokers charges
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3. Main differences
Index Construction Formulae• CPI
– mostly geometric mean– based on European regulation
• RPI– arithmetic mean– from historical rules developed under auspices of earlier Advisory Committees
Geometric mean Arithmetic mean• generally below the arithmetic mean
• reflects changes in spending patterns relative to changes in price ie substitution from dearer to cheaper products
• generally above the geometric mean
• assumes no substitution between products
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3. Main differences
Topic CPI RPIProduct Coding
• standard international classification system• consistent with system used by National Accounts
• long standing system not used except for the RPI
Rounding (annual & monthly rates of change)
• calculated from unpublished, unrounded data
• calculated from rounded published data
Procedures for making changes
• follows from European Regulation agreed by Member States
• proposed changes require approval of UK Statistics Authority• Authority consults Bank of England on whether change is fundamental and materially detrimental to index-linked gilt holders• if materially detrimental, consent of the Chancellor• public consultation
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4. Uses and Users of the CPI & RPI
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4. Uses and Users of the CPI & RPI
CPI:
• macroeconomic indicator
– UK Government’s official inflation target
– deflation of certain economic series
• international comparison and inflation measurement
– used by Eurostat in calculation of European Union inflation
– nearly always used when UK inflation compared to other countries
• income adjustment
– indexation of salaries?
– indexation of pensions and benefits
• price adjustment
– contract escalation?
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4. Uses and Users of the CPI & RPI
RPI:
• macroeconomic indicator
– inflation measure
– deflation of expenditure and output
• income adjustment
– indexation of tax allowances
– indexation of salaries
– uprating redemption values of certain gilts and national savings certificates
• price adjustment
– contract escalation
– price regulation
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5. CPI and RPI Governance
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CPI Governance
• European statistical systemSeries of regulations
• UK part of the ESS, so has influence over decisionsONS represents UK view
• UK does not have a free hand to dictate changes to CPI
• Unless UK decides to pursue a national version of the CPI…
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RPI Governance – pre 2008
• Previously managed via RPI Advisory CommitteeThe Committee advised the Chancellor on RPI
methodological issues etc
Met only infrequently• Last met in 1994
‘Major’ changes considered by the RPIAC
RPI kept up to date through regular update of basket of goods and services and of weights etc
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RPI Governance – post 2008
• Statistics and Registration Act 2007 established new arrangements
Proposed changes require approval of Statistics Authority
Authority to consult Bank over whether proposed changes are fundamental and materially detrimental to index linked gilt holders• If yes, then Authority needs Chancellor’s approval for the
change
• If no, then Authority can proceed with change
Authority established a group of experts to advise them – the Consumer Prices Advisory Committee (CPAC)
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CPAC Terms of Reference
1. To advise the UK Statistics Authority on the implication for the Retail Prices Index (RPI) of the improvements to this index recommended by the Office for National Statistics (ONS).
2. To provide the UK Statistics Authority with advice on RPI methodological issues.
3. To advise the UK Statistics Authority on improvements to the UK Consumer Prices Index (CPI) recommended by the ONS.
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The new governance framework
• Enables:RPI to be better measured through implementation
of improved methods
Greater alignment of RPI and CPI methods
ONS to have access to expertise on inflation
Greater transparency on proposals for change
Clear and efficient decision making process
• But:Still not easy to make changes to the RPI
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6. Future CPI & RPI Work Programme
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CPAC programme
• Possible implementation in 2011 /12Further development of owner occupiers’ housing
costs for the CPI
Measurement of rents in the CPI and RPI
Measurement of cars in the CPI and RPI
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CPAC Programme
• Possible implementation in 2012 /13Review / update sample selection of locations for the
CPI and RPI
Review of the optimum base period in the construction of the CPI and RPI
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CPAC Programme
• Possible implementation in 2013 /14Speeding up publication of CPI and RPI
Review of data collection methods for CPI and RPI
Review temporal coverage of CPI and RPI
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National Statistics Assessment
• Published in December 2010• Made five recommendations
Develop greater understanding of use made of the statistics
Publish information about timeliness of statisticsPublish information on history and reasons for
differences between CPI and RPIEnsure new website improves accessibility of
informationEnsure releases are issued at 9.30am
• To be implemented by May 2011
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Also some suggestions
• Some about the range of outputsRegional price indicesIndices for range of different household typesPossibly an index of perceptions of inflation
• Some for more analysis and explanationTo explain uses and potential usesOf strengths and weaknesses of CPI and RPI as
macroeconomic measures and as compensation indices
Explain differences between price index and cost of living index
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Other suggestions
• Some about presentation of informationFurther improve statistical bulletin
• Additional commentary on external developments• Drawing attention to significant information in latest
figures• Include clear explanation when differences between
CPI and RPI is significant
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7. Consultation
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Consultation
• Number of different channels:– As part of wider consultation
• Recent ONS wide consultation
– Formal consultation:• Mortgage interest payments• Seasonal items
– Via Statistical Bulletin• Review of changes to Bulletin
– Via regular contact with users
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