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From:
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Andrew Baldwin
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To:
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RPICPI User Group
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Posted:
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February 13, 2013 10:15 PM
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Subject:
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RE:Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
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Attachment(s):
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Message:
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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.
Show Original Message
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Original Message:
Sent: 13-02-2013 09:52
From: Andrew Lydon
Subject: Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
I never heard the CPIH mentioned in the hearing.
Carney did say he was just raising a theoretical possiblity about abandoning inflation targetting, but over here quite a few in the media and some politicians wanted the target abandoned. I think wishfull thinking was being put on Carney's earlier words.
There was a long boring section on the timings of inflation targets. Yet what no one really mentioned is that since the crash Canada's inflation has normally been below target, whereas ours has been significantly above. When Carney talks about bringing inflation back on target he meants stoking it up to 2 %.
Similar in the US. Their inflation has been below target. Hence they can talk about holding interest rates how until.....
By complete contast to that side of the pond, our problem here is that the prospect of squeezed living standards is undermining consumer confidence and consumer demand.
AL
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Original Message:
Sent: 12-02-2013 09:16
From: Andrew Baldwin
Subject: Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
Carney is obviously ill-informed about the CPIH being implemented, the subject of Andrew Lydon's complaint. In his written reply to the TSC's questions he indicated that it would be coming out next year some time, not next month, and he seems to believe that it will include housing prices, with an OOH methodology along the lines of the RPI, and not an equivalent rent series. One of the TSC members should have flushed out just what his misconceptions are concerning the CPIH, but none of them did.
I am very uncomfortable acting as Carney's defender, but I don't think he was really backpedalling so much from his Toronto speech on NGDP targeting. He made a speech in NYC last February that dealt with NGDP targeting and price level targeting in about equal measure. He didn't endorse either as a general policy but thought they both conceivably had merit over a number of years for an economy stuck at the ZLB. The Toronto speech was notable for emphasizing NGDP targeting at the expense of PLT, which was relegated to the footnotes, but it still mentioned both. For an economy at or near the ZLB with inflation below target, like the US, NGDP targeting or PLT, while different in philosophy, would both involve allowing more inflation than one would accept under an IT regime. For a country like the UK, with inflation over target for years now, PLT would involve a more restrictive, not a looser, monetary policy than IT, which is probably why it doesn't seem to be discussed much here. Even the most extreme inflation nutters in the UK probably don't want to commit the Bank of England to ensuring a 2% average rate of inflation over the period from, say, 2010-2015. Its day may come though. If one believes price stability is the main goal of monetary policy, a PLT policy, which doesn't let bygones be bygones, has more appeal than an IT policy, which does.
By the way, in his NYC speech a year ago, Carney specifically attacked NGDP targeting on the basis that the price component of NGDP, the GDP deflator, excluded imports. Now in his written remarks to the TSC he favours the CPI as the best inflation indicator for the UK, with a caveat about it excluding housing costs. He is quite unfazed about it, like the GDP deflator, taking a domestic approach rather than a national approach, like the RPI and the Canadian CPI. It seems that somewhere on the road to Damascus he saw a flash of light and was converted to HICP principles. I am happy for him. Unfortunately I haven't heard him preaching the new faith since his return to Canada.
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Original Message:
Sent: 11-02-2013 07:48
From: Andrew Lydon
Subject: Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
I watched mark Carney's presentation to the Treasury Select Committee on BBC Parliament last night.
Frankly Mark Carney was retreating from any notion of targeting Nominal GDP as fast as any rock star could.
I was mainly following the hearing because John Mann MP is now regularly bringing up the issues that I have been working on about the Bank of England and did so last week with Carney.
http://www.johnmannmp.com/john-mann-challenges-bank-of-england--why-do-savers-and-borrower
http://localisewestmidlands.org.uk/2012/interest-rates-being-rigged-what-the-parliamentary-banking-commission-should-be-looking-into/
The Ombudsman is currently assessing my complaint about the CPIH, which was referred for me by one of our Birmingham MPs.
AL
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Original Message:
Sent: 10-02-2013 10:54
From: Gareth Jones
Subject: Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
Rightly or wrongly, it is said that Mark Carney favours use of Nominal GDP as the BoE target measure. Nominal GDP is of course a combination of real GDP (the change in which we know as economic growth) and the GDP deflator (as a measure of inflation).
None of this involves use of a Consumer Price Index.
I have long advocated use of the GDP deflator instead of a Consumer Price Index for Inflation targeting. If reports are correct Mark Carney agrees but wants to add an economic growth measure to the overall target.
GJ
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Original Message:
Sent: 08-02-2013 10:58
From: Andrew Baldwin
Subject: Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
Sorry, I won't be able to attend unless the ONS is willing to pay my travel expenses. (No harm in asking.) Did I miss an announcement on whether the ONS intended to incorporate council tax in its CPIH measure or not?Logic would seem to dictate that they don't, since it is neither part of the HFCE deflator, nor is it consistent with the rules for compiling HICPs to include indirect taxes that aren't associated with particular goods or serrvices. I noticed that Governor Carney mentioned the CPIH as "a useful development" in one of his written answers to questions posed to him by Andrew Tyrie and the Treasury Select Committee. It would be nice if we could nail down just what development he finds so useful before it is actually published next month.
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Original Message:
Sent: 04-02-2013 07:02
From: Jonathan Gardner
Subject: Fourth Meeting of the RPI-CPI User Group - postponed to 25 March 2013
The fourth meeting of the RPI-CPI user group, originally scheduled for 12 February 2013 has been postponed to 25 March 2013. Delaying the meeting to March will allow us to meet after the ONS has published the responses to the recent consultation on the RPI and publication of the first appearance of the new inflation indices CPIH and RPIJ. We apologise for any inconvenience caused. A revised outline for the event is below: 14.30-14.45 Registration with tea and coffee
14.45-15.00 Welcome and update from the Chair (Tony Cox)
15.00-15.30 Discussion of the outcome of the consultation on the RPI
15.30-16.00 Outline of the ONS' work programme for 2013
16.00-16.20 Discuss user group priorities for 2013
16.20-16.30 Conclude and depart The event will take place at the Royal Statistical Society, 12 Errol Street, London EC1Y 8LX (for a map see here). Those interested in attending should email events@rss.org.uk
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