“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:
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.