RPI/CPI User Group

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1.  The measurement of real income in the UK: options for a coherent approach

Posted 14 days ago

Dear users,

This morning we published "The measurement of real income in the UK: options for a coherent approach". This article explores the conceptual challenges regarding the measurement of real household income in the UK. It examines what it means for price and cost indices to be coherent with income measures, and presents how a family of measures could be produced to provide a better understanding of the real value of household income.

While this article discusses the measurement of real income conceptually, it is hoped that the discussion will help guide decisions regarding the future development of statistics that measure income growth, and statistics that measure changes in prices and costs. We therefore welcome feedback on the contents and implications of this document.

Kind regards,
Helen 



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Helen Sands (Prices Division, ONS)
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2.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 13 days ago
Good luck with this.  I think you're going to need it.

GJ


3.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 11 days ago
Gareth

Can't say I agree.

Coming up with inflation figures for segments of the population will not prove as difficult or as in need of luck as coming up with a figure for the 'overall' household sector in a society as diversified or as unequal as ours.

I say good luck to those trying to come up with a figure for the sector as a whole. Because even if by some chance they got it right, there will be huge swathes of the population that will not relate to it.

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AL

how the US CPI actually worked to contain housing inflation

http://www.localisewestmidlands.org.uk/2012/housing-reflation-and-housing-inflation-alternative-inflation/
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4.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 10 days ago
Andrew

I was thinking of the problems of defining income, rather than inflation.  Both are difficult and real income even more so.

Gareth


5.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 7 days ago
I would like to add that what is needed is to measure income per head of population, not total national income.  This introduces a further measurement problem, in that one has to estimate the country's population.  Recent migration figures have thrown serious doubt on the estimates of migration and population.

So two ratios have to be estimated, viz.  income per head and then income per head divided by a price index.  Good luck.

GJ


6.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 9 days ago
Dear Andrew:

I think we may agree to disagree on inflation measures for different household groups. They may not differ so much over time as people think. The logic behind this is that the difference between inflation rates for different household groups in the same country or region depend on three factors:

1) differences in the basket shares of particular goods for the different household groups,
2) differences in price movements of the different goods,
3) the correlation between differences in the basket shares of the different groups and the price movements of the different goods.

The Institute for Fiscal Studies actually uses demographic groups based on households with children and without children, which would potentially differ more in their basket shares than the kind of income breakdowns that are more commonly used. Households without children wouldn't be spending on children's clothing (or very little), for example. Really, the demographic groups that tend to show the biggest differences in inflation rates tend to be those defined by tenure status: tenant, homeowner with mortgage, homeowner without mortgage, but these groups don't tend to get proposed to much for analysis of inflation rates or of real income movements.

The weak link in arguing for big divergences between different demographic groups tends to be the third factor. . However, there doesn't seem to be good reason to believe that in the medium- or long-term the particular goods on which, say, low-income people devote more of their income will in the medium- or long-term show show much stronger or weaker inflation than other goods.

This is well explained by my old supervisor, Bohdan Szulc, in ch.8 of the Canadian CPI reference paper for the 1992 basket update:


It also somewhat undermines the case for calculating a household cost index based on an average of household basket shares, since the difference between that kind of a consumer price series and the conventional one based on expenditure shares is not likely to be large. Just the same, it doesn't discredit it. Households are entitled to believe that an overall household cost index reflects their expenditures and an index based strictly on expenditure shares will not reflect the expenditure patterns of a median household.

There is probably a stronger case for regional HCIs than for HICs for different household types, and this will be even more true if there is a devolution of taxing powers to the governments of Northern Ireland, Scotland and Wales.

Best regards,

Andrew






7.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 8 days ago
Andrew

Different segments of the population, including the regions, should be exposed differently to the housing markets (ownership and rental). Together these should be the biggest weights in any UK basket.

Maybe over time I would want to see that the inflation suffered across the social spectrum be low and similar. But it would not be the case in the run up to the current economic era because of the housing inflation 1997-2007.

And in future, there would hopefully be an era in which inflation would be different across the segments if the country could overcome the current housing difficulties. Some segments of the population should experience a counter-inflationary benefit, and they and the policy solutions that might bring that about should be credited with that in the inflation figures. Otherwise it would fail.

I don't think any of this was anticipated in 1992 in the UK, nor in Canada. And the IFS is part of the problem in this country not part of the solution.

The problem we have now is that extraordinary monetary policies have been in place since 2008/9, and the ONS say they have not got reliable adaptable figures before 2006 !!!!!

I have lost confidence in the current authorities to make any progress on these problems, and will not be devoting much effort to further dialogue with them. I am currently raising these issues with politicians.

------------------------------
AL

how the US CPI actually worked to contain housing inflation

http://www.localisewestmidlands.org.uk/2012/housing-reflation-and-housing-inflation-alternative-inflation/
------------------------------



8.  RE: The measurement of real income in the UK: options for a coherent approach

Posted 13 days ago
Dear Helen:

Thank you very much for this document. I have not given it the detailed analysis it deserves but thought I should quickly respond before others or myself get too deeply into the weeds on the issue and lose sight of basic principles. 

In our paper for the 2017 CEA meeting:

economics.ca/2017/papers/AJ0047-1.pdf

John Astin and Jill Leyland (I can't take any credit for their categories) draw a fundamental distinction between
consumer price series that are traditional indices like the RPI and those that are macroeconomic indices 
like the HICP. One of the uses to which the RPI was designed to serve as the 1986 Advisory Committee 
Report on the RPI states, is "for calculating the purchasing power of after-tax incomes, interest payments, 
etc." so serving as a deflator of nominal income series was one of the traditional uses of a traditional index. 

The HCI should be the successor series to the RPI/RPIJ as the traditional consumer price series for
the UK, even if there is no commitment in this regard as yet from the ONS. It would seem reasonable to
see it being used as a deflator for real income series, as the RPI was in the past. These could relate to special income or demographic groups or to national 
income series, for particular demographic groups but need not do so. The HCI will not be a macroeconomic 
index, but it isn't helpful or accurate to call it a microeconomic index, especially not the index for the overall
UK population.

Decades ago, Ralph Turvey noted that if a nominal income series included imputed rent as a component 
of income, then logically the deflator must adopt a rental equivalence approach to owner-occupied housing.
So it is obviously logical that gross disposable household income (GDHI) would be deflated by such an
index. GDHI is a National Accounts aggregate so in that sense its deflator is a macroeconomic index. Just
the same, the GDHI deflator is obviously based on diametrically different principles from the UK HICP, which 
serves as the Bank of England inflation indicator. I really don't see any useful purpose in putting them in
the same category.

For the most part, real income series (think of the national AHE or AWE estimates) will not incorporate imputed
rents, and then a properly calculated HCI would arguably be a better deflator than any consumer price series
that included an imputed rent component.

Neither the CPI nor the CPIH is in any way an appropriate deflator for any UK nominal income series. How 
could a series that excludes the expenditures of UK tourists abroad but includes the expenditures of foreign 
tourists in the UK, that includes foreign students' tuition fees at UK universities but excludes UK students' 
tuition fees at foreign universities, possibly be considered fit for purpose?

Thank you again for your document, which I will continue to look at.

Best regards,

Andrew