RPICPI User Group

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Quality Adjustment for scrappage schemes in the CPI or the RPI

  • 1.  Quality Adjustment for scrappage schemes in the CPI or the RPI

    Posted 07-10-2017 01:29
     
    In Shaun Richards's latest blog he discusses the UK motor vehicle market and the incentives offered by manufacturers to buy new cars:
    https://notayesmanseconomics.wordpress.com/2017/10/06/will-car-loans-be-the-canary-for-uk-unsecured-credit/
    He writes: "Whether the price cuts for new models have been picked up by the inflation numbers I am not sure as I wonder if the scrappage schemes are treated separately but the truth is prices are lower." Looking at the ONS 2014 Technical Manual it would seem that these scrappage schemes aren't directly taken into account at all, and their impact on measured inflation, if there is one, would only manifest itself in the used car component of the CPI or RPI.
    Is this the case or will scrappage schemes be reflected in the new car component of the CPI or RPI?



  • 2.  RE: Quality Adjustment for scrappage schemes in the CPI or the RPI

    Posted 21-10-2017 13:55
    Because ONS has placed such a high priority on measuring OOH costs, other things may have been neglected.

    The most important neglected thing is the formula effect which accounts for almost all of the difference the CPI and RPI.

    But also the cost of motor vehicles could do with a review.  A few points which need attention are:

    a) The increased use of leasing of new cars by households
    b) The trade in value of cars, which may vary quite lot with special schemes such as scrappage.  This is essentially a question of discount.
    c) Quality adjustment procedures.

    GJ



  • 3.  RE: Quality Adjustment for scrappage schemes in the CPI or the RPI

    Posted 27-10-2017 14:12

    Dear Gareth and Andrew,

    Thanks for raising these points, and apologies for not responding sooner.

    On scrappage schemes, these are not taken into account. There is a question of whether, conceptually, they should be included. Our approach for subsidies or discounts (which is in line with practices for producing the HICP) is that the price should be measured as 'gross' if the discount is only available to a restricted group of households. This would seem to be the case for scrappage schemes, given that there are certain restrictions on age/specification of the old car. I'll reply more fully on this soon.

    It is fair to say that car leasing has become more prevalent, and we are aware of this. We have previously investigated it, but we came up against a problem with finding suitable expenditure data to produce weights. This is likely to be worth revisiting.

    Following the Johnson Review's recommendations, we have initiated a project to review and monitor our quality adjustment procedures. We took a paper outlining our plans to the most recent Technical and Stakeholder advisory panels, and hope to implement the outcome in January 2019.

    Thanks,

    James.




  • 4.  RE: Quality Adjustment for scrappage schemes in the CPI or the RPI

    Posted 28-10-2017 14:32
    Dear James:

    Thank you very much for your reply. No need to apologize for the delay. I am sure there are a lot of demands on your time.

    I take your point about scrappage rate incentives being available only to certain motor vehicle buyers. In this case, though, the incentive is available, not to a certain demographic group, say, those with incomes falling below a certain threshold, but to anyone who has a vehicle to trade in that meets certain criteria. Also, as Shaun makes clear, to the average person such an incentive does just look like a price reduction in a weak market.

    It is great to hear that you are considering an index for leased cars. The Canadian CPI has had such an index since its January 1998 update, when the 1996 basket was introduced. Unfortunately, when it was based on priced data it was more an illustration of mistakes to be avoided than a model to be followed. For a long time now it has been proxied based on new car purchases, which is arguably acceptable for a consumer price series designed as a macroeconomic inflation measure but quite inappropriate to an index used for upratings.

    In my view, if you do develop an index for motor vehicle leases, you should develop two of them, one for each type of consumer price series.

    Good luck with your work. I am delighted that the ONS has identified motor vehicle leases as a priority, and will also be taking a closer look at scrappage rates.

    Best regards,

    Andrew







  • 5.  RE: Quality Adjustment for scrappage schemes in the CPI or the RPI

    Posted 02-11-2017 16:19
    Hi All

    Thank you to Andrew for taking my point forwards. I logged on today to pursue it only to discover that I can in fact receive an answer without having posed the question, at least on here anyway! If only all things were that simple :)

    If I may thank James for his reply there are two issues with it. Firstly these are qualification criteria which the manufacturers are hoping everyone will pass rather than the other way around! If you turned up with almost any old jalopy you are likely to qualify especially if it is a diesel. These are price cuts masquerading as something else.

    The issue of dealing with the leases is very important in the light of the way that ONS has dealt with owner-occupied housing. It is being treating in a rental/leasing manner when one does not exist and yet the car market which is now over 86% leased according to the FLA is not. Frankly that looks embarrassing and whilst I am pleased it is being looked into it is long overdue.

    Regards

    Shaun