Hi Andrew

We have had some discussion of chain linking before. I posted something around 26th Nov 2016 following up your suggestion around that time. There are different options for chain linking as the discussion showed and although the CPI is constrained for the time being by EU legislation, CPIH and RPI are not. So I agree that a change is desirable.

Having said that I would not expect such a change to make much difference to the formula effect. What now seems ages ago, I showed, by comparing the Jan formula effect averaged over many years with the formula effect for other months of the year averaged over the same years, that the difference in chain drift between the RPI and CPI was less than 0.02% per annum compared with a formula effect of about 1.0% per annum. Changing the chain linking arrangements will therefore have a very small impact on the formula effect.

The formula effect is caused almost entirely by using a non-linear transformation in taking averages in the CPI. I don't know of anywhere else in statistics where this is done, except perhaps in outlier treatment.

Gareth

Original Message:

Sent: 14-02-2017 22:21

From: Andrew Baldwin

Subject: Technical APCP Publications

Dear Helen Sands:

Thank you for these documents. A quick observation on the formula effect: the use of January links seems to be making an important contribution to the size of the effect. Simply replacing the January links with December links would probably reduce it considerably. My own preference would be for annual links (i.e. calculating index numbers for 2017 with annual 2016 values as the base, but this would be against the current rules for calculating an HICP. There is no reason one could not calculate a household inflation index in this way, though, and in the long run I believe the rules for calculating an HICP should change. Annual links are more stable than monthly links whatever calendar month is chosen and are particularly advantageous for seasonally disappearing items that may not be available in January (Christmas trees) or in December (in my country, tickets to Canadian Football League games; I am sure there are similar examples for the UK).

Whatever its scope, some study of the choice of link period as it affects the formula effect should be considered.

Best regards,

Andrew

PS I won't have the use of my own computer again until February 23. I find what I can do on my son's is pretty restricted or this would be a longer and better researched e-mail.