The UK Statistics Authority announced today that it will respond to the House of Lords report ‘Measuring Inflation’ on 4 September. It’s hard to know how UKSA will respond as, due to its actions and inactions, it and the measurement of inflation is in a deep hole. The Lords report said (page 4) that the “present position of the Authority is untenable” and that “it should fulfil its statutory duty to promote and safeguard the quality of official statistics and to do that, it should request a fix to the clothing problem”. This note sets out three truths that I hope – but do not expect – UKSA to cover. UKSA needs to be honest about formulae, stop being biased and act independently.
The three points in this note are based on my contribution to the meeting held at the RSS in July 2018 following the publication of the controversial ONS “shortcomings” paper published in March 2018.
Formulae
To simplify, the ONS and other critics of the RPI mainly blame the Carli formula (used in the RPI) for the index’s so-called problems. The same people have a view that Jevons, the alternative formula and the one used in the CPI, is far superior. This is simply not true and I offer two pieces of evidence.
- The CPI’s measurement of clothing pre 2010 was terrible. Over two decades to 2011, clothing prices apparently more than halved, when the CPI as a whole was up by more than a half. The CPI clothing component was more “wrong” relative to aggregate CPI pre-2010 than the RPI clothing has been since, post-2010 – and for much longer, and it was a larger weight. So Jevons caused more damage to the measurement of UK’s clothing than Carli has.
- Rates of clothing inflation in many EU countries look implausible. Over the last decade Polish and Bulgarian aggregate CPIs showed almost identical growth yet one has clothing falling by 37% and the other rising by 17%. Lithuania clothing fell by 12%, Estonia rose by 41%. The Irish numbers are simply extraordinary. These are divergent, nonsense trends, despite using Jevons.
Yet it seems that neither the nation states that produce these figures nor Eurostat that governs them have noticed. The ONS turns a blind eye. No one blames the Jevons formula for these trends, so why is Carli the reason for RPI’s problems in the last decade? It is the price collection of clothing that is the problem. If you put poor quality raw data into any formula the results will not be plausible.
Bias in ONS thinking
ONS seems unable to appreciate the consequences of two truths about the measurement of inflation:
- Inflation is a latent variable. The true rate of inflation is unknown yet ONS states stridently that the RPI is wrong and CPI is good. The evidence is, in contrast, that many experience inflation closer to RPI than CPI.
- There are different uses and users of inflation indices. No one price index fulfils any one of those purposes perfectly. No one index is perfect for all purposes. Household or pensioner experience of inflation is conceptually and (probably) numerically different to macroeconomic inflation. The differences in construction between RPI and CPI are not, as ONS says, problems to resolve, they have evolved over time, are there by design and justified.
Politics and independence
The Lords’ report made clear that ONS/UKSA was not acting independently. The committee suggested that statisticians are afraid to change the construction of RPI for fear of it leading to fiscal costs from redeemable index-linked gilts. But this is UKSA playing politics not doing statistics. ONS needs to produce the RPI and produce fit for purpose official statistics – and not to worry about the gilt market. This is due process, as set out in legislation.
Political interference happens at all levels and at every opportunity. It seems that attendees from the ONS, Bank and Treasury usually outnumber others at stakeholder panel meetings. In contrast, the RPIAC in the 1990s had 4 out of 21 from the same institutions. That UKSA has had to wait to publish its response to the Lords report until the Treasury is ready (and that the publications are co-ordinated) is hardly a sign of independence. It’s not hard to imagine who had the final say over the content of the responses. The Treasury’s involvement is all the more odd given UKSA is a non-ministerial department reporting to the Cabinet Office.
Click here to see to see a longer note prepared by me for the RSS meeting in July 2018. It notes all the issues with the “shortcomings” paper.
britain in numbers 