Yesterday saw quite a development in the UK inflation measurement saga as the Treasury Select Committee joined the fray by writing to the UK National Statistician John Pullinger.

As the Economic Affairs Committee presented in their report, the error caused the RPI to be artificially inflated by 0.3 percentage points in 2010……There was general agreement amongst the witnesses spoken to that the 0.3 percentage point increase was an error, and of course you yourself admitted this. Instead of fixing this however, you have designated RPI a “legacy measure”, making no further  improvements to the index. This is not a tenable position when the index remains in widespread use. The past RPI index-linked Gilt matures in 2068.

As I have already replied to the Financial Times on the subject there are some good parts to this but also problems.

Fair enough, except we have an immediate problem as the very bodies which have so failed us over the past 7 years such as the UK Statistics Authority are now supposed to fix a problem they are not only part of they have contributed to. When I gave evidence to it I felt it was simply going through the motions.

The National Statistician and the UK Statistics Authority have failed so comprehensively they cannot be part of the solution. Also as I have reflected on this there are two other problems. Firstly the approach above seems to want to turn the clock back to before 2010 when the RPI was affected by a change in the method of collecting prices for clothing which has turned out to especially impact fashion clothing. Whereas we need to go forwards with an improved model. Also they have come out with a 0.3% number out of thin air as I recall the evidence of Simon Briscoe who gave the most evidence in this area and he wanted further research to get a number rather than stating one, So this from the Treasury Select Committee is both unfounded and potentially misleading.

This has led to a £1 billion yearly windfall for index-linked gilt holders, at the expense of consumers, like students who have seen interest on their loans rise, or rail passengers affected by increasing fares.

You see students,consumers and rail passengers have been affected by a political choice which was to use the higher RPI for when we pay for things and the invariably lower CPI when the government pays for things. Former Chancellor George Osborne was responsible for this swerve which boosted the government;s finances via a type of stealth tax. So I can see why government MPs are keen to push this view but more surprised that opposition MPs have joined in, perhaps they were so busy looking good for the crowd they did not stop to think.

There is also another serious problem as I wrote to the FT.

Next we have the issue that official communiques seem to forget that there are problems with other inflation measures too. For example the House of Lords was very critical of a major part of the measure the UK Office for National Statistics has pushed hard.

 

“We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs”

 

Can anybody spot the mention of the flawed CPIH above? Those of a fair mind looking for balance would think it deserves it. You see it is always like that……

As you can see there are familiar issues here where the establishment takes evidence but then cherry picks it to come to an answer it wanted all along! A balanced report would recommend changes to both RPI and CPIH. After all the latter is supposed to be the new main inflation measure. Also the use of 0.3% seems to be answering a question before it has been properly asked! We were supposed to go forwards and measure the impact of the changes made in 2010 so if the MPs via their own expertise have calculated the answer at 0.3% they should explain their calculations and reasoning.

I will be writing to them challenging them on these issues. They seem to be unduly influenced by the work of the economics editor of the Financial Times Chris Giles who keeps claiming that index-linked Gilt holders who he called “the gnomes of Zurich” at the Royal Statistical Society. I have challenged him on that statement as after spending many years in that market I do not recall ever dealing with one of these creatures and we know that many UK pension funds including the Bank of England one invest in it instead. Until we do the proper research we cannot know if there has been a windfall let alone the size of it. Chris is much quieter these days past about his vigorous support of CPIH and rental equivalence.

Today’s Data

This brought some welcome good news.

The all items CPI annual rate is 1.8%, down from 2.1% in December.

This has various consequences as for example it has been quite a while since the Bank of England has been below its inflation target. Although as it was partly to do with the Ofgem price cap some of it will not last as it reversed it a few days ago.

The largest downward contribution to the change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago.

Actually just as I am typing this I see this on Sky News.

Energy supplier Npower says it will raise its standard gas and electricity prices by 10% from 1 April.

If we look further upstream for price trends we see that the pressure continues to be downwards.

The headline rate of output inflation for goods leaving the factory gate was 2.1% on the year to January 2019, down from 2.4% in December 2018…..The growth rate of prices for materials and fuels used in the manufacturing process slowed to 2.9% on the year to January 2019, down from 3.2% in December 2018.

If we move to the RPI we see that it fell as well and also would have been on target in annual terms.

The all items RPI annual rate is 2.5%, down from 2.7% last month. The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
2.5%, down from 2.7% last month.

Comment

It is a welcome development that I can point out that UK real wages are now increasing against all our inflation measures. After a credit crunch that has been something of a nuclear winter for real wage growth it is nice to see and report on, but sadly we have a long way to go to get back to where we were. Some good news in what looks like an economic downturn.

Let me translate my views on inflation measurement above to a real life example. You see if you follow the establishment mantra you tell people they are better off than they are as the Resolution Foundation has done here.

 

Using the CPIH inflation measure understates the fall in real wages we have seen via its use of rents that are never paid ( Imputed Rent) as a measure of owner occupied housing costs. For newer readers CPIH assumes that people who own a house pay themselves rent and even worse these “estimates” are based on rental data which is dubious and suggested by some to be 1% too low via the wrong balance between new and old rents. In a nutshell this is why I have persisted in my long campaign about inflation measurement because the establishment is happy to produce numbers which to be polite are economical with the truth. I am not.