There’s No Such Thing as… Car Prices
A nice reminder that price index data is a work of
fiction statistical genius on which it is perfectly safe to base macroeconomic policy. Reading through the ONS announcements today, this is how they describe the new methodology for determining car prices used in the national accounts:
4.2.2 New approach to be implemented in September 2014
For the new approach the list prices from Glass’s Guide are reduced to take into account discounts negotiated at the point of sale. The percentage discount applied for each model is partly offset by an uplift to account for point of sale accessories/optional extras purchased.
Discussions with industry experts including Glass’s and HM Revenue and Customs (HMRC) established that data on discount prices and amount spent on optional extras isn’t available. As an alternative method, “target price” information from What Car magazine (monthly publication) has been used to estimate a best achievable discount. The target price is a guide to a typical achievable discount based on a team of What Car mystery shoppers (people posing as customers) who haggle with dealers. A discount percentage for each model is calculated using the target price data. Since this represents the best discount available, the discount calculated has been reduced by 30% to take into account not all customers will achieve this price (i.e. not everyone will negotiate the optimum discount).
“We took the figures for discounts out of a magazine and knocked 30% off for good measure.” Why 30%? Don’t ask too many questions.
The discount applied is further reduced to account for point of sale accessories/optional extras purchased. Research suggested metallic paint is the most popular extra added. This option isn’t typically available by moving to an improved model in the range which other optional extras often are. Looking across a range of models the cost of metallic paint typically offset the original What Car discount price by approximately 35%. ONS have therefore further reduced the discount calculated by a further 35%. The What Car best achievable discount price has therefore been reduced by 65% overall.
“Then we knocked off another 35%”. Let’s hope there are no spreadsheet errors.
In fact it’s even worse: this method is used to calculate the deflator used for car sales, which is applied to the survey data on the volume of car sales to produce current price (nominal) spending. The ONS really does produce RGDP first and NGDP second for some (many?) sectors. The more I learn about price index and national accounts methodology, the more attractive nominal wage targeting becomes!