I don't believe the CPIH was mentioned in the hearing, but it was in Carney's written statement. Carney was asked a wide-open question about inflation measures in the UK and this was his ever so terse reply: 8. What is your view of the measures of inflation used in the UK?
I do not yet have a well- developed view of this, and I would note that the choice of price
index used to define the MPC's 'price stability' objective is for the Government. My
preliminary view is that, in terms of methodology, the Consumer Price Index is the best
available measure of price increases over a basket of goods and services typically
purchased by consumers. Its main omission is of course that it excludes housing costs for
owner-occupiers, but I understand that a new index - CPIH - will be launched next year
incorporating these costs. This will be a useful development.
In general, my view is that to the extent possible the characteristics of a good measure of
inflation to target are:
It is representative of the costs facing households;
It is well-understood and widely accepted as the relevant measure;
It is produced by an independent statistical agency, and
It is not subject to revisions.
In making judgements about the outlook for inflation, monetary policy should look through
the temporary effects of, for example, energy and commodity price changes and variations in
indirect taxes. At the Bank of Canada, we believe that measures of 'core' inflation, which
exclude certain volatile items from a price index, can be useful operational guides for policy,
even though they are not appropriate definitions of long run price stability. If movements in
commodity and food prices, for example, are judged to be temporary, a core measure that
excludes those items can be a guide to where inflation will head once the effect of those
movements has passed. These can complement other measures of underlying inflation pressures such as growth rates of pay and unit labour costs.
When one considers that this is part of a written response, sent January 25, to a letter received on December 19, one can only wonder at such an incredibly weak and ill-informed response. There is literally nothing in his reply that couldn't have been learned from reading the Bank of England's August Inflation Report
, which contained a box on "Incorporating owner-occupiers' housing costs in a measure of consumer price inflation". In fact, he didn't properly digest even the information one might find in that technical box, since he seems to believe that the CPIH measure will contain house prices, not equivalent rents. My supposition is that he believes the housing costs included would be similar to those found in the OOH component of the RPI, since he makes it clear in his answer to question 9 that he is opposed to the net acquisitions approach to OOH, although he makes no effort to say why. The technical box also makes clear that the CPIH measure will be published for the first time in March 2013 but Carney writes that it will published next year.
Oddly, if only because he has in-laws living in England, he seems to neither know nor care that the UK has an RPI series, which is calculated with almost the same methodology as the Canadian CPI All-items. He speaks about the Canadian core CPI measures, but seems to no nothing about UK core measures of consumer price inflation.
He also shows no awareness of the efforts of Eurostat and the ONS, going back to 2000, to calculate OOH(NA) series.
By the way, Carney's statement that the official Canadian core CPI measure excludes "variations in indirect taxes" is inaccurate. This series is calculated by StatCan but is controlled by the Bank of Canada, so Carney bears full responsibility for its shortcomings. It includes property taxes (the Canadian equivalent to council tax), motor vehicle registration fees, and drivers' licence fees, all of which are classified as indirect taxes in the Canadian System of National Accounts. The variations in these indexes are NOT removed in the core CPI: they are simply included as is. The variations in VAT and other sales taxes are excluded from the core CPI measure. The Bank of Canada has never issued anything remotely resembling a methodology document, so it is a little unclear whether the variations that are removed are legislated changes in indirect taxes, as in the UK CPI-CT or if other changes are removed as well. This does make a difference as effective VAT rates on new house purchases will rise with rising house prices, even if there are no legislated changes in VAT rates.
I sent the attached document to the members of the Treasury Select Committee in advance of Carney's testimony. I got automated responses from five of them, but I doubt that any of them read it, or if they did, it in no way influenced their questions. It occurred to me after I sent it that quite likely Governor King holds similar views to Carney about housing prices in the target inflation indicator. He has complained about the Eurostat measures without making it clear what his complaint is, but never, so far as I know, about the RPI measure, so maybe he believes that housing prices should have a depreciation rather than a net acquisition weight.
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