FOI REF: FOI/2023/1179
You asked
The information I seek pertains to the methodology that the ONS employs in stripping out energy costs from the computation of core inflation. More specifically, I am interested in understanding whether your methodology only removes direct energy cost bills, or if there is a protocol in place to also account for and extract the indirect effects of energy costs in other sectors that contribute to the overall inflation calculations. In detail, my query can be elaborated as follows:
How does the ONS account for increased energy costs in the hospitality sector, such as hotels, where these costs may be passed onto customers in the form of increased rates, thereby contributing to inflation?
In the telecommunications industry, energy plays a pivotal role in the functioning of data centres and mobile network infrastructure. Is there a system for considering these energy costs which could conceivably be passed onto consumers through higher mobile contract prices?
Are indirect energy costs in other sectors such as the transportation industry accounted for? In this context, increased fuel costs can cause a rise in the cost of public and private transportation, which could then lead to a ripple effect in the cost of other services due to increased delivery expenses.
How does the ONS adjust for the energy costs incurred in the manufacturing of building materials, such as cement? Given that the production process of cement is energy-intensive, an increase in energy costs can inflate the costs of construction and housing.
We said
Thank you for your request.
We can confirm that the Consumer Prices Index (CPI) excluding energy, food, alcohol and tobacco, (commonly referred to as core) strips out only the direct energy costs measured in the index. These are the components covered under electricity, gas and other fuels, and motor fuels and lubricants. The indirect effects of energy costs in the hospitality sector, telecommunications industry, transportation industry and the manufacture of building materials are captured in the prices collected to represent these sectors in the index, but they are not measured separately and not removed in the calculation of core.
The methodology used to produce core is the same as used to produce the overall CPI albeit without including the energy, food, alcohol and tobacco components. This is described in detail in our Consumer Prices Indices Technical Manual, accessible via the following link: Consumer Prices Indices Technical Manual 2019.
Although not a part of the standard CPI production, we recently produced an analysis of energy intensity in the CPI, accessible via the following link: The Energy Intensity of the Consumer Prices Index 2022.
This estimated the importance of energy on various components in the index and, overall, it concluded that the CPI has an indirect energy intensity of 6.6%. While the article measures the importance of indirect energy, it does not attempt to remove this to produce a measure of core inflation.
You may also be interested in a further recent article which discusses new estimates of core inflation calculated by trimming the classes with the most extreme movements from the overall aggregate. This is accessible via the following link: New Estimates of Core Inflation UK 2022.