RPICPI User Group

last person joined: 3 months ago 

To foster co-operation and the exchange of information between the ONS, its advisory bodies and other users. Please see 'Aims of the RPI/CPI User Group' in the library for further details.

ONS Understatement of Telecommunications Improvements

  • 1.  ONS Understatement of Telecommunications Improvements

    Posted 20-01-2018 23:37
    ​Hi all,

    Bit surprised not to see any discussion here of the recent news on understatement by the ONS of improvements in the quality of telecommunications goods.
    News articles here (sorry - behind paywall):
    https://www.ft.com/content/abc14c66-fb78-11e7-a492-2c9be7f3120a
    https://www.thetimes.co.uk/article/productivity-may-be-better-than-thought-after-ons-gets-wires-crossed-hhm73prkv
    Original ESCoE paper by Richard Heys & others here:
    https://www.escoe.ac.uk/wp-content/uploads/2017/02/ESCoE-DP-2017-04.pdf
    Follow-up letter by the ONS here:
    https://www.ons.gov.uk/news/statementsandletters/lettertothefinancialtimesregardinginflation

    I think it is fair to capture their conclusions in one quote:

    "Our findings indicate that the current deflator [for the Telecomms industry] is upward biased and that telecommunications services prices could have fallen between 35% and 90% between 2010 and 2015, considerably more than the current deflator, suggesting the need for continued research in this area."


    I am, however, rather surprised by the blasé tone of the ONS's follow-up letter which implies that this has no implications for CPI.

    That contrasts with the Bean review (which the ONS seem very keen on) which (para 3.25) illustrated:

    "For instance, telephone and telefax equipment and services accounts for about 3% of aggregate CPI, if one applies an average improvement in quality of 35% for every year between 2006 and 2014 to reflect the average increase in data traffic within this period,then accounting for the greater benefit associated with the internet connection would lower overall CPI inflation by slightly more than one percentage point per year over the period considered."
    (the 90 percentage point drop in the ESCoE range would equate to an annualised improvement of more than 35%pa)

    Can anyone explain why we shouldn't be concerned about the possibility of a material revision to the past CPI data series once comparable work is done on the CPI series measurement?


  • 2.  RE: ONS Understatement of Telecommunications Improvements

    Posted 21-01-2018 11:24

    Richard,

     

    It would seem to depend on what a quality change actually is.

     

    One question would be to ask how much of the increase data traffic is associated with advertisements.

     

    I suspect that, though my use of the web has not changed that much since the mid-nineties when I started, I will soon have to upgrade to fibre because of the advertisement load.  Adverts used to be single small graphics and now they tend to be elaborate videos which take up a lot of band width.  I would tend to classify this as a loss of quality through forced quality change.

     

    There is also poor design of web pages.  For example, the BBC used to have an excellent text based news service on the web with very few graphics which would load quickly whatever the download speed.  They stopped that sadly.

     

    Now my use of the web may be very different from the typical user given my background but looking at the profitability of Facebook and Google would suggest that there is an issue here.

     

    Arguably there is a difference between a deflator for the Telecomms industry and both the macroeconomic CPI and a household index like RPI and its likely replacement in HII/HCI.

     

    All the best.

     

    Arthur.




  • 3.  RE: ONS Understatement of Telecommunications Improvements

    Posted 21-01-2018 12:33
    I am inclined to agree.

    Since I contracted for BT infinity, speeds have become lower on average.  I cannot see any improvements in telecoms quality from my point of view.  This is subjective and variable between persons.

    However there has been a large increase in price which is indisputable.

    GJ


  • 4.  RE: ONS Understatement of Telecommunications Improvements

    Posted 21-01-2018 13:03

    Gareth,

     

    Thanks for the reminder about speeds becoming lower.

     

    Effectively what consumers are buying is a share of the bandwidth that is available from the exchange.  So we are all competing for bandwidth with our neighbours.  As more people use the bandwidth for more purposes – and why wouldn't they as they are paying for it – then speeds drop.

     

    I had hoped that as more of my neighbours moved to cable that my bandwidth on copper wire would increase.  However I suspect that the provider has simply reduced bandwidth on copper to coerce people to move to cable and pay the higher cost– a bit like the old razor blade marketing trick.

     

    A commercial company's primary objective is to get the consumer to pay more not to provide a better service or product.

     

    Packet switching technology may allow more data to travel on a single wire or cable but it only provides so much capacity.

     

    All the best.

     

    Arthur




  • 5.  RE: ONS Understatement of Telecommunications Improvements

    Posted 21-01-2018 13:37
    Another matter which needs to be taken into account here is the security (or lack of security) of internet based communication and also telephone communication.

    I have personally had to take a number of measures to try to protect my own security.  Other people have not.

    I know some people who have stopped using the internet or limited their use of it because of security considerations.

    This is a major reduction in quality which is difficult to quantify but which is very large.

    GJ




  • 6.  RE: ONS Understatement of Telecommunications Improvements

    Posted 22-01-2018 03:16

    Hello Richard:

    Thank you for mentioning this. As a matter of fact, one member of the RPI CPI User Group, Shaun Richards, devoted his entire January 18 blog to the same article you referenced:

    https://notayesmanseconomics.wordpress.com/2018/01/18/was-the-uk-productivity-crisis-just-an-illusion/

    I glanced at the ESCoE discussion paper then but didn't read it. You encouraged me to read it, so thank you for that.  

    It seemed to me the paper conflated quality adjustment issues and issues relating to index number formulas as to the reason why the deflator was showing too much inflation. The paper starts by saying that a superlative index (actually any index that passed the time reversal formula would do) like the Fisher would be a better measure of price change than a Laspeyres index. Later on this thought is simply dropped. The SPPI is a Laspeyres index, with basket that is updated every five years, like the other UK producer price indices. (It is a better index of this kind than similar Canadian producer price indices, since when a new basket is introduced its basket reference period doesn't start with the basket reference year but with an earlier year if it is judged more relevant. For example, the 2010 basket took effect in 2009 rather than 2010.) As I understand it, the paper not only calculated new price indices for diferent items in telecommunications services, but aggregated them using a Paasche or a chain Paasche formula. One would generally expect a chain Paasche or Paasche index to show less inflation than a Laspeyres index for the same item indexes.

    The paper notes that the CPI uses a chain Lowe index formula, so there is less upward substitution bias for its formula than for the SPPI. Nevertheless, it can't compare with a chain Fisher index , a chain Walsh index (like the Swedish CPI) or a chain Edgeworth index, which would pretty much eliminate substitution bias completely. This is tangential to the main thrust of the paper, that quality improvements in services were not being properly accounted for. Just the same, it isn't unimportant. For ICT products, the choice of formula is almost certainly  more consequential than for most other consumer products.

    You tell a tidy story: quality adjustment for telecommunications services is inferior, therefore the CPI inflation rate tends to be too high year after year, fix the problem and the measured inflation rate will tend to be lower. My issue, the  better treatment of seasonal goods in the CPI, by contrast, is a messy story. Things are being done wrong, if you were to do them right a lot of things would have to change, including the convention that the annual index is a simple rather than a weighted average of its monthly index numbers. Index reform would cause the inflation rate to be higher than the unreformed index sometimes, lower other times, but it wouldn't likely remove any  persistent upward or downward bias in the index. This is probably why members of the group seem more willing to engage in your issue than in mine. However, thank you for drawing attention to it, as it is an important issue.

    Best regards,

    Andrew




  • 7.  RE: ONS Understatement of Telecommunications Improvements

    Posted 26-01-2018 15:47
    Dear all,

    Apologies if you have already seen this, but here is a link to an ONS blog post, published last week, that clarifies some points Measuring the digital economy: Is history about to be rewritten?


    James (ONS)