On 9 March this year I wrote to the UK Statistics Authority Chair Sir Andrew Dilnot with my initial views following the consultation on the future of consumer prices indices. Since then there has been much further discussion about the proposals that I set out. This note addresses a number of points and constitutes my formal response to the consultation. It also gives an update on the work to improve the Consumer Price Index including owner occupiers’ housing costs (CPIH) with a view to it being considered for redesignation as a National Statistic.
Following the publication on 3 March of the UK Statistics Authority Assessment Report on CPIH, a great deal of work has gone into addressing the requirements set out in the assessment. We have already taken a number of steps to increase confidence in CPIH and over the coming weeks we are looking to engage further with users.
The Authority's regulatory office will continue to review the evidence provided about how the Office for National Statistics (ONS) has demonstrated that it has established the credibility of and increased users’ confidence in CPIH, and the Authority will also continue to engage with users itself over the coming months. I understand that any decision to redesignate CPIH will be based on the degree to which CPIH meets the standards of quality, trustworthiness and value expected by users.
I have listened to views on CPIH and ONS has engaged with interested parties and released a number of publications to raise understanding and confidence. Various users have indicated that they are open to recognising CPIH as the main measure of consumer price inflation and are comfortable with the methodology behind it.
I have therefore concluded that we will make CPIH our preferred measure of consumer price inflation as I indicated earlier this year. I believe that CPIH has a number of desirable properties, most notably the inclusion of an element of owner occupiers’ housing costs. It also addresses several flaws and limitations present in alternative measures. We intend to make CPIH the preferred measure from March 2017, by which time all the planned improvements will have been implemented. I recognise the importance of our preferred inflation measure being of recognised National Statistics status, and to that end we continue to work towards redesignation as early as possible.
As well as those detailed in the October bulletin, the additional improvements due to be implemented are the inclusion of Council Tax in CPIH from 2005 for the first time, and revised weights for owner occupiers’ housing costs in line with the most up to date Blue Book estimates in the National Accounts.
I recognise that some users, particularly in the financial markets, have asked for further clarity about precisely which sub-indices of the Retail Prices Index (RPI) will continue to be published. To that end ONS has published a comprehensive list of what will be continued and discontinued.
I also want to clarify the future of RPIJ. In my letter to Sir Andrew in March, I set out my intention that RPIJ would no longer be published. Since then it has come to my attention that a small number of users employ this measure, and others are considering adopting it. After giving this further consideration I can however confirm that ONS will cease publication of RPIJ from March 2017. I have made this decision because, although RPIJ addresses the problems relating to RPI’s use of the Carli formula, RPIJ shares RPI’s other shortcomings, including using a direct measure of house prices to estimate owner occupiers’ housing costs. It therefore is not a good economic measure of consumer inflation. Continuing with a second measure of inflation which has these shortcomings will not help to create a clear and coherent understanding of inflation in the UK. We will continue to publish information about the formula effect and the RPI/RPIJ “wedge” so that users can understand how the difference between the Carli and Jevons formulas affects consumer price inflation measures.
Finally, my previous letter referenced the “Household Inflation Index”, which we have developed under the name of the Index of Household Payments (IHP). As promised, ONS has published initial proposals and timescales for development of the index and invited users to submit their views.
Having considered the views submitted I remain committed to the development of the IHP. There remain a number of conceptual and practical issues to be addressed but I am confident these can be worked through and therefore that we should continue its development. Once we have clarified the concepts around the IHP and launched it as an annual measure, ONS will then give consideration to the feasibility of moving it to a quarterly measure. In parallel we will aim to develop and publish comparable quarterly measures of household income which, taken together with the IHP, would provide a full picture of household income and expenditure.
In progressing all of the above, I will continue to work closely with users and the advisory panels on consumer prices.
National Statistician and Chief Executive, Office for National Statistics
10 November 2016