RPICPI User Group

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Confusion about inflation

  • 1.  Confusion about inflation

    Posted 12-12-2017 22:07
    Hi All

    The reason for my post is that the UK consumer inflation release today had numbers which went up, numbers that went down and one which stayed the same! Rather embarrassing I think when they are supposed to measure the same concept.

    The up was provided by the Consumer Prices Index or CPI

    "The all items CPI annual rate is 3.1%, up from 3.0% in October."

    The number above was what the media led with and it remains by far the most reported inflation number for the UK.

    The down was provided by the Retail Prices Index or RPI

    "The all items RPI annual rate is 3.9%, down from 4.0% last month"

    Lastly the unchanged was provided by the CPIH

    "The all items CPIH annual rate is 2.8%, unchanged from last month"

    Frankly this looks like a dog's dinner where you can get pretty much any answer you like by choosing a particular measure. It should not be like that. This is only added to by the way that the media is wisely choosing to ignore the ill fated CPIH.

    More details can be found here.

    https://notayesmanseconomics.wordpress.com/2017/12/12/take-your-pick-as-uk-inflation-rises-via-cpi-and-falls-via-rpi-whilst-staying-the-same-via-cpih/

    Regards

    Shaun Richards


  • 2.  RE: Confusion about inflation

    Posted 13-12-2017 04:51
    Dear Shaun:
    Thank you for your post; it is unusual to see these indices moving in different directions, and no doubt confusing to users.
    At the risk of being simplistic, I think the differences between the movements of the major indicators can be substantially explained in terms of their different treatments of owner-occupied housing costs and council tax. The CPIH includes council tax, whose index only changes in April at the start of the fiscal year in April, so in November its annual inflation rate would be the same as in October, and it tends to stabilize the index. The OOH component's annual inflation rate also went down slightly, from 1.6% in October to 1.5% in November, so this likely accounts for the CPIH inflation rate not increasing in November, as the CPI inflation rate did, since both these components are excluded from the CPI, and this is all that distinguishes them.
    As far as a series for upratings is concerned, the RPI adjusted for the formula effect (i.e. the RPIJ), would still be the best choice and it went from 3.2% in October to 3.1% in November.  (The formula effect on the annual inflation rate was -0.8 percentage points in both months, so the change in inflation rate in terms of percentage points was the same as for the RPI.) The housing depreciation component of the RPI showed a monthly drop for the first time since April (-0.4%), dragging the annual inflation rate down from 4.5% to 3.9%. (In November 2016 there was a 0.2% monthly increase,  which dropped out of the annual inflation rate.) The RPI for dwelling insurance and ground rent also showed a deceleration, going from an inflation rate of 8.3% in October to 7.9% in November.  Since neither component is part of the CPI, this would largely explain the drop in the RPIJ inflation rate while the CPI inflation rate, although the inclusion of council tax in the RPIJ but not in the CPI also counts for something.
    As far as an inflation measure for the Bank of England to target, the best current monthly measure would appear to be the RPI ex MIPS ex council tax, adjusted for the formula effect, which in most months, including October and November 2017, shows virtually the same annual inflation rate as RPIX adjusted for the  formula effect. Its annual inflation rate went from 3.4% in October to 3.2% in November. The bigger drop than for the RPIJ inflation rate is because, with MIPS and council tax out of the series, the decelerations in the inflation rates for housing depreciation and dwelling insurance have a bigger impact.
    In calculating the depreciation component there is a geometric smoothing of housing prices. Whether this is justifiable or not in a depreciation index, it certainly has no value if one treats this index as a proxy for a housing acquisitions index.  However, the ONS data shows housing price inflation going from 4.8% in September to 4.5% in October, so at least the direction of movement appears to be accurate.
    Hopefully the new HCI series will remove the need for an RPIJ, and a proper monthly CPIH(NA) series will remove the need for an RPI ex MIPS ex council tax series, adjusted for formula effect.  For now though, I think that they remain useful indicators.
    Best regards,
    Andrew







  • 3.  RE: Confusion about inflation

    Posted 13-12-2017 10:32

    It would be useful if ONS could put the two months indices on SUN to 2 decimal places.  This would allow the UG to see if the usual 1dp publication is inadvertently exaggerating differences between the indices.

     

    Regarding an unchanged CPIH my understanding of the rental equivalence index is that it can be interpreted as a moving average centred 9 months or so in arrears which may well have dampened any change.

     

    All the best.

     

    Arthur.




  • 4.  RE: Confusion about inflation

    Posted 15-12-2017 12:34
    Hi Arthur

    Thank you for your reminder of the "smoothing" of the rental data in CPIH  which although we have discussed it before had slipped my mind. If anyone at the ONS is monitoring this would they please be kind enough to update us on whether the series is still effectively lagged by around 9 months?

    Regards

    Shaun Richards


  • 5.  RE: Confusion about inflation

    Posted 18-12-2017 14:37
    Hi,

    The 12 month rates to 2 dp for each index are below. Just for reference, indices to 3 decimal places for CPIH and CPI are available in tables 56 and 57 of the monthly tables. These aren't published for RPI, but table 5 gives a breakdown of the differences between CPI and RPI rates to 2 dp.

      CPIH CPI RPI
    12 month rate October 2017 2.76% 3.00% 3.96%
    12 month rate November 2017 2.82% 3.09% 3.88%

    As Andrew mentioned, OOH has had an effect on the gap between CPI and CPIH. Between October and November 2017, prices were flat, having risen in the same period a year ago. This meant that OOH made a downward contribution to the change in the CPIH rate between Oct and Nov 2017. 

    The main factors acting to decrease the RPI relative to the CPI/H were motor fuels (the RPI prices are collected on index day, whereas CPI/H are collected across the month), air fares (due to differences in the weights between RPI and CPI/H) and house depreciation. These effects were partially offset by Mortgage Interest Payments.

    We'll get back to you on the point about OOH smoothing/lag.

    I hope this helps,

    James.




  • 6.  RE: Confusion about inflation

    Posted 19-12-2017 10:06
    James,

    Thank you for the 2dp figures.

    They neatly illustrate the issues that can arise with rounding.  The difference between the CPIH and CPI October to November changes is 0.03 at 2dp rather than the 0.1 implied in the published 1dp figures.

    This does not imply that either figure is wrong or that figures should be published at 2dp but simply that rounding can produce counterintuitive results.

    All the best for Christmas and the New Year.

    Arthur


  • 7.  RE: Confusion about inflation

    Posted 20-12-2017 08:01

    The trouble wirh publishing to two decimal places is that it would be spurious accuracy.  Changes of less than 0.1% would be examined and commented on although they would be meaningless.  Of course, there is no need to take just the percentage change rounded to one decimal place; the changes may be calculated from the two index levels with rather greater accuracy.







  • 8.  RE: Confusion about inflation

    Posted 19-12-2017 16:27

    Hi James and thank you for your prompt reply on this matter.

    One bit I would like to tidy up please. You say this in your message.

    "As Andrew mentioned, OOH has had an effect on the gap between CPI and CPIH. Between October and November 2017, prices were flat, having risen in the same period a year ago"

    This could be misconstrued in this sector as to meaning house prices. Am I correct in assuming you mean imputed rents?

    Regards

    Shaun




  • 9.  RE: Confusion about inflation

    Posted 21-12-2017 15:25
    Hi Shaun,

    Yes, that's right.