Home > Inflation, Monetary Policy > “The Price Index is Never Revised”, RPIJ and CPIH Edition

“The Price Index is Never Revised”, RPIJ and CPIH Edition

The “revisions” critique of nominal GDP targeting seems ever more absurd as time passes.  The argument pushed by some is that it’s hard for monetary policy to target something which gets revised, like the nominal GDP statistics, but we can target the CPI because that does not get revised.

So here is brief a look at this year’s two new ONS series.  First is the CPIH, which is a revised version of the CPI now including owner-occupier housing costs.  Second is the RPIJ, which is a revised version of the RPI, switched to use the Jevons formula.  The UK’s inflation target between 1993 and 2004 was a variant of the RPI which excluded mortgage payments, the RPIX series.  The ONS now lack confidence in both RPI and RPIX to such a degree that the series are no longer designated as “national statistics”.

Given these revisions to the price index methodology, is there any change of heart from the inflation-targeters?  We spent ten years targeting a price index which is now considered to be of a poor quality!  Was that not a bad thing?  Was not UK monetary policy “wrong”, ex post, because we now have a different – better – way to calculate inflation?  Or doesn’t it matter?

The answer is surely that it doesn’t matter.  We already dumped the 2.5% RPIX target in favour of a new target using a “better” methodology, 2% on the CPI, and I don’t recall anybody making hysterical arguments about how badly misguided UK monetary policy had been under the RPIX target.  Methodology changes, and policy adapts.

Here is a graph of the cumulative “error” in the RPI and CPI methodology, compared to RPIJ and CPIH respectively:

Revised UK Price Indices

Revised UK Price Indices.  Source: ONS: RPI, RPIJ, CPI, CPIH

Both the RPI and CPI “overestimated” inflation in comparison with the new indices.  The total change in prices over fifteen years measured by the RPIJ was 6% smaller than the change in prices measured by the RPI.   The change in prices over eight years measured by the CPIH was nearly 2% smaller than the change measured by the CPI.

The latter is particularly interesting; for all the talk of the Bank of England “blowing bubbles” by ignoring soaring housing prices, the inclusion of owner-occupier housing has pulled down the price index since 2005.  Targeting such a price index would, if anything, have allowed slightly easier – not tighter monetary policy over the last eight years.

Categories: Inflation, Monetary Policy
  1. sK
    April 17, 2013 at 09:19

    Some comments:
    -Cannot find if CPIH does included council tax. Can you confirm if it does or not?
    -How accurate is the rental equivalence provided by VOA? How is this information collected? if i read correctly on the website the information is provided on goodwill basis from letting agencies and landlords?

    Also what would the BoE inflation performance be if the CPIH was used instead of the CPI? Would they still fail to hit the target after 60 months?

  2. sK
    April 17, 2013 at 09:24

    One final observation, if HMRC are using rental equivalence from the Private Rental Statistics of VOA, then I am not so sure about the size of the sample.
    The latest reports highlight circa 490K rents in England which sounds not enough.
    If we accept that around 15-17% of the population is renting private, and then the number of the rents should be much higher the 490K reported?

  3. Ravi
    • April 23, 2013 at 15:14

      Ravi – thanks, yes. Absolutely awful news for Sweden, I fear :(

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