RSSeNEWS to be determined...

A comprehensive review of issues relating to the measurement of inflation is being urged by the President of the Royal Statistical Society (RSS), David Hand, in a letter to UK Statistics Authority chair Sir Michael Scholar, (pdf format, opens in new window).

The letter sets out three areas of concern:

• The way in which the Consumer Price Index has over the years gained increasing prominence in ONS material and is now the headline index even though it is not necessarily the best index for all purposes
• Methodological differences, the “formula effect” and the RPI
• The need for the Consumer Prices Advisory Committee work to be more open.

Relating to the prominence being given to the Consumer Price Index (CPI), David Hand writes:
“Recently the ONS has changed its press notice so that only the CPI appears as the headline index. We do not feel that CPI should have sole star billing in this way.

"While the policy use of the CPI clearly makes it a key index, other indices are key for other uses. Giving prominence to CPI ahead of other indices means that users are implicitly being encouraged to use it for purposes, such as wage negotiations, for which it is not ideal. Naturally, this is exacerbated by the resulting impact on media commentary, and the lack of clear guidance on the appropriate use for the range of inflation measures available.”

The letter then highlights how rates of inflation shown by the CPI and RPI can at times differ widely, identifying the impact of a ‘formula effect’.

Addressing the issues David Hand writes that:
“It is easy enough to explain when this occurs as a result of coverage differences. But the RPI inflation rate has also been consistently higher than the CPI rate due to the “formula effect” whereby the RPI uses an arithmetic mean at the lowest level of aggregation while the CPI uses a geometric mean. 

"Over the last five years, according to the ONS press notice, the difference in the annual inflation rate due to the formula effect has never been less than 0.43 percentage points and has been as high (recently) as 0.86 percentage points.”

He goes on to say that “[we] consider it highly unsatisfactory that a difference in statistical treatment should generate such a substantial difference in the two indices”.

Finally the letter calls for the work of the Consumer Prices Advisory Committee (CPAC) to be more open, saying that there would be benefits both for the committee itself and for users and other interested parties:
“Publication of [the CPAC] work programme would give interested parties a better understanding of what issues it is addressing and the timetable on which it is doing so. This should be complemented by publication of summary minutes allowing interested parties to understand those decisions that had been taken, and those areas where further discussion was felt necessary.”