Who wants to be a millionaire?

… I don't.
Have flashy flunkies everywhere? I don't.
Who wants the bother of a country estate?
A country estate is something I'd hate.
Who wants to wallow in champagne? I don't.
Who wants a supersonic plane? I don't.
And I don't 'cos all I want is you.
etc Cole Porter (High Society, 1955)

But before one turns one’s back on wealth, what defines a millionaire in modern Britain? Ed Miliband, in his ‘One Nation’ Party Conference Speech in October, said:

… What do [the Government] choose as their priority? A tax cut for millionaires. A tax cut for millionaires. Next April, David Cameron will be writing a cheque for £40,000 to each and every millionaire in Britain. Not just for one year. But each and every year. That is more than the average person earns in a whole year. At the same time as they’re imposing a tax on pensioners next April. Friends, we, the Labour Party, the country knows it is wrong. It is wrong what they’re doing. It shows their priorities. And here’s the worse part. David Cameron isn’t just writing the cheques. He is receiving one. He’s going to be getting the millionaire’s tax cut.

So his definition of a miilionaire was someone earning £1 million or more a year. I wonder if Cameron actually achieves that, even with private income on top of his PM’s salary of £142,000. But for other people the definition of a millionaire is the less demanding one of someone who has wealth of over £1 million rather than that amount of annual income. But what is wealth? The Office of National Statistics (ONS) has been engaged for some time in a Wealth and Assets Survey. This has been producing some interesting data, for example the regional (particularly north-south) variations in wealth in the UK (to be in the wealthiest 10% of households the asset level is £967,000 and over – not quite £1 million), shown below. I suspect that the SW region, if sub-divided,would show a gradation from darkest to lightest, east to west. 

But their approach poses a problem in definition, as the pie chart below makes clear. It shows how the “economic wealth” of all the households in the UK, about £10 trillion (or £1000 billion) was defined for the purposes of the survey:

As can be seen, about 46% is in the form of private pension investments and another 33% in property. The relevance of either of these to personal affluence is arguable. A private pension investment is a constrained form of wealth because it can only be accessed as an annuitised income stream (usually a pension) after a certain age until death. While in payment it is subject to income tax. As far as property is concerned, certainly for the owner, net of any mortgage, it is an asset which can be realised. However, we all have to live somewhere at some sort of cost.

These distinctions matter when people start to throw around numbers relating to pensioner millionaires and the fairness of them receiving benefits such as the winter fuel allowance during a time of austerity. Take, for example, Rachel Sylvester in The Times at the end of October:

According to a forthcoming report from the Intergenerational Foundation [IF], the number of wealthy pensioners is rising rapidly, with almost 2 million people over 60 in households with assets above £1 million and 988,000 millionaires over 65. Its analysis concludes that the Government is spending about £500 million a year on winter fuel allowance and free bus passes for millionaires. That can’t be right. The motto “we’re all in it together” is only valid if it applies to old and young, as well as rich and poor.

Indeed “That can’t be right” if only because there are several things wrong here. Firstly, there’s a clear misinterpretation of what IF said in their report. They do provide an estimate of nearly 2 million (1,855,300 actually) people over 60 in households with assets above £1 million. And also 988,600 over 65 – but that is the number in households worth over a million, not individual millionaires. The distinction is important because the average household size for the over 65s is 1.39. Well, that’s what IF say (Table 5). Now, if Ms Sylvester and her spouse wanted to split their combined assets they would probably choose to divide them equally. And if those assets were less than £2 million, neither of them would expect to be classified subsequently as millionaires.

There is a more fundamental issue lurking here relating to private pension investments. How should their value be treated once turned into an income stream? Secondly, why ignore the value of public sector pensions prior to payment? One way of avoiding this is to look solely at income. Last month Chris Skidmore MP, one of the Free Enterprise Group of Tory MPs, produced a report with the snappy title of A New Beveridge: 70 years on - refounding the 21st century welfare state, with a section on Wealthy pensioners (page 19):

There are 100,000 households with a retirement income of more than £100,000 a year, and 988,000 over 65s in Britain who have assets worth at least a million pounds.

Neither of these figures is supported by a reference and the second is repeating Sylvester’s error above. Anyway, the report recommends that:

… the richest pensioners with separate incomes over £50,000 should no longer receive winter fuel allowance, a free bus pass and free TV licenses. (page 3)

While this avoids looking at wealth per se, it repeats the well-known anomaly of the child benefit ceiling, but for an older age group. For example, the household consisting of a former high-flyer, now with a £80,000 pension but whose spouse never worked possibly to help them get there, would receive fewer benefits than one with two less starry £40,000 pensioners and would also pay a lot more income tax! In a relatively early post here in February 2011 on the same subject (then raised by the Institute of Economic Affairs, which provides the Free Enterprise Group’s “administrative support”), I commented:

It is a matter of political judgement as to whether the ire of a particular group in society and consequent loss of votes is worth incurring.

Nothing seems to have changed yet, but if the economic situation deteriorates further, some withdrawal of these benefits seems inevitable – and at below £50,000 pa as well.

UK second homes in the EU

A post here a year ago attempted to estimate the number of UK residents who own properties in the EU. This was with a view to assessing the impact of their voting in any “In/Out” referendum on EU membership. The assumption was that property ownership would probably make them more reluctant to leave rather than less. On the basis of the data then available and some assumptions that were little more than guesses, I came up with a figure of 500,000 EU properties and the possibility, at two votes per property, of a million votes being involved.

Now some data from the 2011 census has been made available in an ONS Statistical Bulletin, Number of people with second addresses in local authorities in England and Wales, March 2011. This states that:

820,814 usual residents of England and Wales (1.5 per cent of the usual resident population) had a second address outside of the United Kingdom.

and that such people:

… were concentrated in London and the South East. More detail on the destinations outside of the UK will be published in later census releases.

As soon as the latter data is made available, I will update this post. For the moment my figure for the EU alone, which I didn’t expect to be at all accurate, seems to have been an overestimate.

However:

• The proportion of the second addresses outside the EU is probably small.
• My EU estimate, such as it was, was for the UK as a whole including Scotland and Northern Ireland which have about 11% of the UK population. Applied pro rata (but note the bias towards London and the South East) my estimate would come down to about 440, 000 properties for England and Wales (E&W). At two votes per property, this would be equivalent to about 880, 000 “usual residents”.

The relevant 2011 Census questions are shown below:

People who own properties in the sunnier parts of the EU and rent them out, if they can, between June and September, may not stay at those addresses themselves for more than 30 days a year – they could, quite properly, have answered Q5 with a “No” and gone on to Q7.

On the other hand, people in the 820,814 who do stay at an address abroad for more than 30 days a year, may not own it. Their views on EU membership would therefore not be influenced by the considerations that property owners might want to take into account.

ADDENDUM 27 OCTOBER

The 30 days a year threshold is worth thinking about. Consider the case of someone who is working full-time with 5 weeks paid holiday a year and public (bank) holidays. They wish to spend as much time in their EU property as possible when the weather is good. So assume they fly out on Saturdays and back on the Sundays 15 days later and that they do this twice a year. The first trip might well be at Easter, to take advantage of Good Friday and Easter Monday public holidays. The next could be in mid-summer, say August. In all, they would have spent 32 days (30 nights) in their property and used 18 days of their paid holiday entitlement. They would have 7 days paid holiday left to take at Christmas and New Year (combined with the three seasonal public holidays) and at other times, which might be adequate for some people.  If they had only only 4 weeks paid holiday, they would have only 2 days left.  This doesn’t seem practical so they are unlikely to be in a position to spend 30 days a year abroad.

Why Britain did not have a “Baby Boom”

In a post in 2011 I made various criticisms of David Willett’s book, The Pinch. One was that the demographic evidence did not support his assumption that the UK had experienced a “Baby Boom” like that in the United States. The same notion is so often trotted out by journalists, that I think it’s worth repeating the key facts again, explaining that the UK had a “post-war bulge”, not a baby boom:

The two World Wars were both followed by short sharp surges in live births soon after demobilisation of the men who had been conscripted to fight. The children born after the First World War in the 1920 surge were, as it turned out, destined to fight in the Second. Then, after victory in 1945, those who survived were able to return home to start their own families. Thankfully, those who were born in that second 1946/1947 surge never had to be conscripted and were able to spread their family-building over a longer period, but nonetheless the concentration was enough to cause a further bump in the birth rate in the 1960s.  

To underline this interpretation, the next pair of charts show the numbers of men and women being demobilised from the Armed Forces in 1945 and 1946, and births in England and Wales in the final years of that decade. That there was a lag of about three quarters (nine months) between demobilisation and maternal deliveries shouldn’t come as a surprise.  Nor should the drop in births in the last two quarters of 1945. This reflected the lower number of young males present in the UK after D Day in June 1944. 

The UK experience was not the same as that of the United States which did have a sustained “baby boom”. This also started with a higher birth rate after GI demobilisation, but then continued more or less unabated through to the 1960s, as can be seen in the chart below.

Sources for the data above can be found in the original post. Another way of making the same point can be found in the Office for National Statistics (ONS) animation of the Age Structure of the United Kingdom, 1971-2085. The frame for 2012 is shown below and I have annotated it to indicate the ‘bulge’ of post-WW2 babies who now in their mid-60s:

UPDATE 13 JUNE 2013

Barry Pearson is another old codger with a similar bee in his bonnet: http://blog.barrypearson.co.uk/?p=3634 which provides a better graphical comparison of US and UK demographics than mine.



Footnote

This post was triggered by an article, Top-heavy pyramid will loom over planet for generations, in The Times on 21 August 2012 by their science correspondent’, Tom Whipple, who really should know better:

… for most countries, the population pyramid — the demographer’s graph of choice, which classically shows each generation bigger than the one preceding — is often no longer a pyramid at all. Instead of being wide at the base and narrow at the top it is shaped more like a cowbell.  

If it were a real structure, the base would struggle to support the top. As a graph, it shows the young struggling to support the old. In the UK the change is particularly stark. As the baby boomers age, a vast bulge works its way up the pyramid into retirement, with all the fiscal menace of a python’s meal working its way along its belly.  

This is what people mean when they talk about the demographic timebomb, and why governments around the world are trying to raise pension ages. But as unpleasant as this outcome may be for taxpayers, if not the wealthy and retired baby boomers with free bus passes, this should not be seen as anything other than a transition period.

I don’t think the ONS Age Structure chart supports talk of a vast bulge, let alone a python’s meal and belly (odd phraseology for a science correspondent, surely). However, it’s more than likely that British journalists will still be writing about ‘baby boomers’ when the UK’s post-war bulge have long died out.  Cheltenham colonels, bowler-hatted civil servants and blue-rinsed ladies all seemed to have endured in print for years after their departure from these isles.


UPDATE 28 NOVEMBER 2015

This turned out to be one of the more popular posts on this blog, so I thought it might be worth adding this chart taken from the ONS’s population projections for the UK published last month.

Unemployment among the South West’s young

To judge from his tweets Ben Bradshaw MP (@BenPBradshaw) is firmly engaged with his Exeter constituency. On 19 July he tweeted:

JSA is Job Seekers Allowance, paid to those who are eligible and between 18 and pension age.

Taking the tweet literally, in Exeter in June 2012 for every 100 18 to 24 year olds who had been in receipt of JSA for more than a year, a year earlier there would have been been only 20. Looking for the actual numbers, I turned to the relevant House of Commons Library Research Paper (Unemployment by Constituency, July 2012, RP12/41 dated 18 July 2012), in particular:

Table 1B which shows that in June 2012 the total number of JSA claimants in Exeter was 2039, up by 23 from a year earlier. Of these, 475 had been claiming for more than 12 months, up by 290.

Table 2 which breaks the 2039 down into 645 aged 24 and under, 1055 aged 25 to 49 and 330 aged 50 and over (9 have been ‘lost’ presumably because of rounding to the nearest 5).

The Venn diagram below brings these numbers together, but the size of the overlapping area which corresponds to those on JSA for more than a year AND aged 18 to 24 is undefined (x):

However, the Economy & Tourism Unit of Exeter City Council produced an Economic Trends Report in November 2011 which provides this data for October 2010 and October 2011 as being 25 and 30 respectively (page 5). Interpolating for June 2011 gives an estimate of 28. Again turning to the HoC Library Research Paper a year ago (Unemployment by Constituency, July 2011, RP11/58 dated 13 July 2011), it is possible to produce a similar Venn diagram for June 2011. And also x can be estimated as about 140 ie’fivefold’.

The implications are pretty startling. The total number of unemployed in Exeter has changed little in a year and the proportion aged 18 to 24 has remained 32%. But the proportion of the 18 to 24s on JSA for more than a year has gone from 4% to 22% in the 12 months since June 11. In the same period for the over-24s the movement was from 11% to 24%. The Office for National Statistics (ONS) Regional Labour Market Statistics, July 2012 show that this trend is apparent among the 18 to 24s across the whole South West region:

As can be seen, the fivefold increase in Exeter is below that of the SW region which is showing a more than sevenfold increase (725%). The SW region had nearly twice the national (UK) movement in the ONS data for the same period, which is up 405%.

IF do do that voodoo

Do do that voodoo that you do so well.

For you do something to me that nobody else could do!

You do something to me, something that simply mystifies me.

Cole Porter

Last year I wrote one of the most hit-on posts on this blog, a critique of David Willetts’ book, The Pinch: How the baby boomers took their children’s future – and why they should give it back. The Pinch has an exalted status, for example in the Spectator on 5 May, Polly Toynbee described it as an “excellent analysis of inequality between generations … [it] should be compulsory reading for the cabinet.”

So it’s no surprise that The Pinch seems to be one of the seminal texts of the Intergenerational Foundation (IF), established to promote fairness between generations. The IF is a registered charity, with no party-political allegiances. From its website one can ascertain that it is based at 19 Half Moon Lane, Herne Hill (in SE London), over the Illusioneer magic shop – “Front entrance via magic shop door, just ring the white bell”, and that it has yet to submit formal accounts to the Charity Commissioners.

Perhaps it’s the influence of the people downstairs, but the IF seems to like to do a bit of conjuring with its statistics. After all, that’s what captures an audience like the Daily Mail’s, which on 10 May ran a story headed Nearly 80,000 public sector pensioners currently paid more than average private sector WORKER. Followed by:

Around 80,000 retired public sector workers get a gold-plated pension which is bigger than the annual salary paid to the average British worker, a shocking report warned yesterday.

The Daily Mail was drawing on a recent IF report and quoted “Angus Hanton, co-founder of The Intergenerational Foundation, [who] said the report demonstrates the true scale of the ‘pension apartheid’ in Britain.” Altogether a kinder treatment than the one he received from the Mail on Sunday on 22 October 2011 under the says-it-all heading, The man who says pensioners should leave their 'empty nest' homes... and the £1.5m five-bedroom des res where his parents live alone, and which went on:

Last week Angus Hanton and his Labour-backed think-tank launched a report saying that ‘empty nesters’ should be ‘encouraged’ through a new land tax to downsize. This, it was argued, would help make room for younger generations. Not surprisingly, the proposals caused anger and concern among older people – most of whom until last week probably hadn’t heard of Mr Hanton or his Left-leaning group, the Intergenerational Foundation, which is championed by Shadow Minister for London Tessa Jowell.  

After hearing him outlining his radical ideas on the radio, they might have spared a thought for Mr Hanton’s own elderly parents. What kind of shoebox dwelling did he have them holed up in? In fact, The Mail on Sunday can reveal that Alastair and Margaret Hanton live alone in a £1.5 million five-bedroom home in one of London’s most desirable suburbs. So has their son – himself a father of four who, incidentally, lives with his family in an £850,000 house nearby – tried to harangue them into vacating it?

But going back to the more recent Mail story, the article’s title and first sentence are contradictory. The ‘nearly 80,000’ number of public sector pensioners comes from the IF report’s Figure 6 (below) – 78,186 to be exact – which it isn’t, given the omission of local government and police retirees from the data.  (The IF seem to have ignored the pensions of former MPs, ministers, judges and colonial service employees as well).

More importantly, the comparison can be made with the pay of either the average private sector worker or the average British worker but not both at the same level. Because, of course, the latter includes British workers in both the private and public sectors. According to the IF report, £25,900 is the “average annual salary” from the 2010 Annual Survey of Hours and Earnings, published by the Office of National Statistics (ONS). The latter makes it clear that in April 2010 “Median gross annual earnings for full-time employees (including those whose pay was affected by absence) were £25,900”. The median (like the mean and the mode) is a form of “average” - the one whose value is set half-way, so 50% of full-time employees were earning less than £25,900 and 50% were earning more.

So how many full-time employees, private and public, were there in 2010? According to the ONS Labour Market Statistics for June 2010 “The number of people in full-time employment was 21.10 million in the three months to April 2010”. So half of them, that is 10.55 million, must have been earning more than the median, or, as IF and the Mail like to call it, the average.

Now here’s a “shocking” thing the Mail could have got its teeth into. According to IF over 97% of the 2.25 million* public service pensioners in Britain get less than the average British worker. And fewer than 80,000 get pensions as big as the pay of the 10.5 million people who earn more than the average. Nearly half of these were in the NHS and were, presumably, mostly retired medical staff. Consultants and surgeons get modest pensions shock?

That there is a problem in the long-term in financing pensions in general, including those in the public sector, is beyond dispute. The problems which IF identify are familiar from the Hutton Report and some of the measures recommended by IF, like the abolition of final salary schemes, are already in hand. Quite why the IF report devotes so much space to the changes to the BBC's pension scheme, when no relevant statistics are quoted from it, is unclear. One of IF’s proposals might have caused some alarm to certain Mail readers, if they’d been told about it:

[The government would] Impose a progressive tax on the highest public sector pensions … without having to re-draw existing contracts [by levying] a progressive tax on public sector pensions that are above a certain threshold (for example, £20,000 per year). Two consecutive governments have set a precedent for specific taxation of certain types of income with their tax on bankers' bonuses, which was designed partly to avoid having to re--‐draw existing contracts. To ensure it was progressive, the tax rate would have to rise with the level of pension (so people on higher pensions paid more).

£20000 per year is, of course, about 75% of the “average British worker’s salary” and an awful lot less than the remuneration of a typical bonus-receiving banker.

I’m afraid this is where the magic coming up through the floorboards in Half Moon Lane must have started to turn into voodoo. Do IF not realise that anyone lucky enough to have a pension much over £40,000 would be a 40% taxpayer anyway? IF must be very naïve to think that there would be any political mileage in bringing in penal taxation of the sort they are advocating. They run a real risk of losing what credibility they have. After all, another recent IF report proposed ‘all-young-person shortlists’ for parliamentary candidates (as if so many didn’t lack experience of the real world already) and additional votes for parents. Requiring a different electoral system and the abolition of one person, one vote, these 'Solutions' really were baying at the (full) moon.

One has to concede admiration, albeit grudgingly, for the entrepreneurial zeal of those who are creating jobs for themselves and others on the intergenerational bandwagon.  "Fairness” is ultimately no more achievable than perpetual motion and underlying all the messaging about it, from IF and others, one can detect a large dose of the politics of envy and of “we want what you’ve got after a lifetime’s work, and we want it now”. Perhaps a closer study of Figure 2 of the IF report will provide some consolation to the young?  Somehow I can't imagine IF's adherents wanting them to lobby for increased inheritance taxes .

* 2,248,371 total ‘Pensions in Payment’ across the ‘Individual Public Sector Pension Schemes’, pages 14-16 of the IF report.

Cost of diesel in euros, pounds – and francs!

Last week I bought some diesel fuel (gazole) at a French hypermarket. There are two things which make it a little less boring than most receipts:

Firstly, the price of €1.32 per litre: at the prevailing exchange rate of £1 = €1.13, this was equivalent to about £1.17 when the best price in southern England was around £1.38 – so about 15% cheaper in France. Hypermarket petrol (essence) on the other hand was €1.51, so about £1.34, much as in England. (Any US readers – this is about $8.30 for a US gallon of gasoline, lucky us!). Incidentally, the French government maintains an online database of all retail fuel prices, with a journey planner.

Secondly, like a lot of receipts in France, it explained, pour information naturellement, that the cost in French Francs would have been FF479.44, this being at the rate of 6.559570FF/€ as fixed on 31 December 1998. A useful aide memoire should France ever leave the Eurozone, which may seem unlikely, but France has a medium-term (2013) deficit problem that will be difficult to address, particularly in view of the presidential election timetable and the country’s historic approach to public expenditure. One obvious measure would be to increase the duty on gazole to the level on essence, but it would certainly be unpopular.

Vintage Petrol Pump in SW England

The photograph above is of a vintage petrol pump encountered recently in SW England. I thought it would be interesting to see when the dials had been frozen, and finally came up with enough data to produce the graphs below, as well.  

UK Historic Motor Fuel Prices, p/l and adjusted for inflation

The second graph, which has been adjusted to 2010 price levels using long-run RPI data, is more informative, but still ignores wage inflation, mileage trends, engine efficiency improvements, and so on. The third shows the proportion of the price which the UK government has taken over the years. It seems likely that if the price of oil drops in the near-term, the government will raise fuel tax to keep prices at about current levels and increase revenue.

Percentage of Fuel Price which is Tax

NOTES

Older readers (who will remember having to learn arithmetic for 12 pence to the shilling and 20 shillings to the £) may notice that the pump in the photograph was wrongly set up. 4 gallons at 2/5 would have given a “THIS SALE” of 9/8, not 17/8. Alternatively, 17/8 for 4 gallons would be at a “PER GAL” of 4/5, the price prevailing circa 1953, and equal to 4.85p per litre in cash terms.

The fuel and tax data came from the AA up to 2005 and the UK Petroleum Industries Association thereafter. Petrol is ‘leaded 4*’ up to 1988, unleaded thereafter. Long-run RPI data up to 2003 is from O’Donoghue, Goulding and Allen’s very useful ‘Consumer Price Inflation since 1750’ published by the ONS, with CSO RPI data thereafter.

Expect golden days, actuarially

In the FT Weekend Magazine 23/24 April (£), there is a pre-Royal Wedding article by Matthew Engel, Welcome to the firm, in which he remarks that:

Actuarially, it is very plausible that he [Prince Charles] will predecease his mother, whose constitution seems more robust than Britain’s.

The Office for National Statistics (ONS) provides data on life expectancy in the form of life tables. Within these, ONS proposes that the “Cohort expectation of life, 1981-2058” is the “more appropriate measure of how long a person of a given age would be expected to live, on average, than period life expectancy.” Various projections are available, but the “Principal projection” provides a life expectancy for a UK female of 85 of 7.5 years, and for males of 62 and 63 life expectancies of 20.9 and 20.1 years respectively*.

While it is impossible to proceed from the general to the particular, and also there will presumably be some inheritance of longevity, mother to son, actuarial plausibility would seem to suggest that good King Charles III's golden days** will last more than a decade!

Engel might have been influenced by Princess Diana’s prediction that Prince Charles would never be King and that William would succeed his grandmother.

*Queen Elizabeth II (85) was born on 21 April 1926, and Prince Charles (62) on 14 Nov 1948.

**Song: The Vicar of Bray

In good King Charles's golden days,
When loyalty no harm meant;
A furious High-Church man I was,
And so I gain'd preferment.
Unto my flock I daily preach'd,
Kings are by God appointed,
And damn'd are those who dare resist,
Or touch the Lord's anointed.
And this is law, I will maintain
Unto my dying day, sir,
That whatsoever king shall reign,
I will be Vicar of Bray, sir!
Etc etc

The Political Potential of Price Indices

The significance of inflation for the Coalition’s economic policies was made clear, from the opening paragraphs of the Executive Summary onwards, in the March 2011 Economic and Fiscal Outlook produced by the Office of Budgetary Responsibility (OBR):

1.1 The key economic developments since our November 2010 Outlook have been an unexpected fall in UK GDP in the final quarter of 2010, a rise in world oil prices, and higher-than-expected UK inflation. The labour market has performed much as expected, with unemployment rising after registering significant falls in the middle of last year
1.2 These data have on average prompted external forecasters to reduce their estimates of economic growth in 2010 and 2011. The average external forecasts for CPI and RPI inflation have risen significantly, again reflecting recent data.

RPI AND CPI TECHNICALITIES

Although they are among the most familiar of government statistics, the generation of the Retail Price Index (RPI) and the Consumer Price Index (CPI) is a complex business. The Office for National Statistics (ONS) CPI Technical Manual explains the derivation of the RPI and CPI figures and the differences between them. To understand these more fully, it is helpful to look at an Information Note produced by the ONS in August 2010, Differences between the RPI and CPI Measures of Inflation. This shows (extracts below) that, although “both track the changing cost of a fixed basket of goods and services over time and both are produced by combining together around 180,000 individual prices for over 650 representative items”, there are three significant methodological differences between the RPI and CPI: Coverage, Population Base and Index Construction.

COVERAGE

POPULATION BASE

INDEX CONSTRUCTION

As the chart below, also taken from the Information Note, shows, index construction is the most significant of the various factors which lead to changes in CPI being lower than in RPI over the same period. It is often referred to as the “formula effect” because of the difference between the geometric mean (GM) and the arithmetic mean (AM) of the same set of data.

The next most significant factor is housing.  There is a comprehensive explanation of the problems in taking account of this in CPI provided in Wikipedia.

IMPORTANCE OF THE CPI

In December 2003 the CPI, which is comparable internationally, became the basis of the inflation target of 2% set by the government for the Bank of England Monetary Policy Committee (MPC). The RPI continued to be used for other significant purposes – for example, pension increases and uprating of taxation allowances. However, the 2010 Coalition budget announced that the CPI will be used for the indexation of benefits, tax credits and public service pensions from April 2011. Later this was extended to be an option for private pension uprating. In the 2011 budget it was announced that most taxation allowances and thresholds would also be uplifted in future by reference to the CPI.

Not surprisingly given the beneficial impact of the formula effect on public expenditure, the OBR, in its March 2011 Outlook, paid close attention to the likely difference between RPI and CPI in the next few years (Box 3.5 page 70), and provided this chart:

Clearly, the impact of the formula effect increased during 2010. The cause, (clothing and footwear) had been the subject of a further ONS Information Note in January 2011, CPI and RPI: increased impact of the formula effect in 2010.

The OBR asserts that the CPI “is better-suited to accounting for the effect of substitution between goods and services when relative prices change”, echoing the ONS’s statement that “An advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services.” However, the Royal Statistical Society (RSS) does not agree. In a recent letter to the Chair of the UK Statistics Authority (UKSA) (the ONS being its executive office) they state:

The UKSA's Monitoring Report concluded that the uses of consumer price indices both as macroeconomic measures of inflation and as "compensation indices" imposed different requirements on the indices. We believe that the need to address this and other issues is now pressing, and are keen to offer the Society's help in doing so. We are concerned, as I am sure you are, about the further damage that will be done to consumer confidence in official statistics if it is perceived that uprating to pensions and other benefits is being governed by an index perceived by many as inappropriate and unfair without a more relevant index being offered by statisticians.
There are good arguments for the CPI as a macroeconomic indicator (particularly once some indicator of owner occupier costs has been included) but, as you know, we do not feel that it currently serves the purpose of being a sufficiently good measure of price inflation as experienced by households to be used in uprating pensions and benefits or for use in wage negotiations …

Lord Hutton recently proposed a new basis for public sector pensions - Career Average Revalued Earnings (CARE) pension schemes, (good outline on the BBC website). A key feature during employment when the pension is being accrued, is the annual uprating, which Hutton thinks should be in line with earnings. Hutton proposed:

Recommendation 8: Pension benefits should be uprated in line with average earnings during the accrual phase for active scheme members. Post-retirement, pensions in payment should be indexed in line with prices to maintain their purchasing power and adequacy during retirement.

But a problem arises with people who leave public service before retirement age:

Ex.18 Regarding the indexation of deferred members’ benefits, there is a trade-off to be made. If the indexation measure were the same as for active members this would favour mobility. If it were lower, for example, if active members’ benefits were indexed by earnings and deferred members’ benefits by prices, this would favour retention. The Government should decide on whether pre-retirement indexation for deferred members is on an earnings based measure or prices based measure, as this decision will need to be based on the explicit objectives that government has about recruitment and retention versus mobility.

THE POLITICS OF RPI AND CPI

Could the gap between the two inflation measures, and the Coalition’s substitution of the CPI for the RPI, become a political issue? This very much depends on the progress of the UK economy in the next few years. Two broad scenarios can help illustrate the situation at the time of the next election (2015 if the Coalition holds).

In the first, Ed Balls’ and Paul Krugman’s predictions are borne out  (for the former's see an earlier post, for the latter's, see his Op-Ed, The Austerity Delusion, in the New York Times on 25 March):

And then there's the British experience. Like America, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government's pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.
But she hasn't: British growth has stalled, and the government has marked up its deficit projections as a result.

If Balls and Krugman are right, whenever the election comes Labour can campaign on the basis of “we told you so” and “things can only get better”. There will no need for them to get over-involved in specific issues and Labour should easily win a working majority.

In the second scenario, the Coalition’s economic policies are to some extent successful, but the pain incurred is not so easily forgiven. The Coalition will try to hang the deficit they inherited around Labour’s neck. In response, Labour may well want to position themselves on the winning side of voter-friendly issues, taking a line clearly different from the Coalition’s while appearing responsible on public expenditure. The 2010 Budget changes involving CPI affected only a minority of electors, albeit a substantial one, pensioners and benefit recipients. The latest changes, extending CPI to allowances, makes the basis of inflation indexing something which affects most taxpayers and voters.  The general public's boredom threshold for a fairly dry mathematical subject can easily be moved up a notch when they realise it concerns money in paypackets.

On that basis, it is interesting to read Early Day Motion (EDM 1629) put to the House of Commons on 17 March under Ed Miliband’s name and sponsored by the shadow treasury team:

PENSIONS INCREASE (REVIEW) ORDER 2011
That this House considers that the Pensions Increase (Review) Order 2011 (S.I., 2011, No. 827) which was laid before this House on 17 March 2011 should be withdrawn because the Order requires the uprating of public sector pensions using the consumer price index, replacing the retail price index which the Government has indicated will be a permanent change; notes that the Government has refused to heed arguments that a temporary three year change to the index used would represent a fair contribution from benefits and pension recipients, at a time when wage growth generally is suppressed, to reducing the deficit whilst not unfairly impacting on their incomes over the longer term; but regrets that the Government has instead indicated that the change is permanent, leaving public sector workers and the poorest in society disadvantaged permanently, year after year, even once the deficit is gone and earnings growth has returned.

It would be naïve to think that before the 2010 election the RPI CPI change had never been an option for government. The Financial Times Westminster blog on 21 June 2010 posted the following:

Darling predicts coalition will link benefits to CPI not RPI

Alistair Darling [the former chancellor] has just briefed the lobby hacks on what to expect from tomorrow’s Budget. Top of his predictions was a change in index-linking for benefits from RPI (and the less well-known Rossi index) to CPI. The obvious benefit … is that the CPI measurement of inflation is usually lower. As a result the government could save about £1bn a year
...
Darling described the shift from RPI to CPI as one of several ideas lying around the Treasury which – having worked there until 6 weeks ago – he was obviously aware of. Some were more “fit for human consumption” than others, he joked.

The Coalition is not slow to claim that, however unpopular its measures may seem, a Labour government would have had to do the same. In this particular case, it looks as though Labour might have had more sense.  On the other hand, they may have got very close, which could explain, as well as the need to seem responsible on expenditure,  why the wording of EdM's EDM seems rather hedged about.

Price Index Peculiarity Resolved

Back in January, I posted about what appeared to be a peculiarity in the way the Consumer Price Index (CPI) was being presented by the Office for National Statistics (ONS). In several months the annual percentage change calculated directly from the published values of the CPI had been 0.1 % lower than the one being published. However, there wasn’t a problem in calculating the Retail Price Index (RPI) % change the same way.

This happened again when the CPI and RPI data for February 2011 appeared. But now, thanks to the kind assistance of Capital Economics, I have the explanation, which comes from the Consumer Price Indices Technical Manual 2010. The process used by the ONS for the RPI is to round the index figures down to the published single decimal place, and then calculate the % change (see the earlier post for the formula). For the CPI, the ONS uses unpublished figures with more decimal places to calculate the % change. The CPI index figures are published after rounding down to one decimal place. The implications of this are that the published indices cannot be used to calculate % changes – for successive 12 month periods the published % figures can be used, but to measure the CPI change over any other period, more exact values of the CPI have to be obtained from ONS. The justification for this can be found on page 80 of the Technical Manual:

The CPI follows the standard ONS approach which is to calculate derived statistics from unrounded monthly indices while the RPI calculations are based on the published rounded indices. The CPI approach limits the impact of rounding effects … and ensures that re-referencing will not in future lead to revisions to one-month and 12-month percentage changes.
...
The RPI approach is transparent in that all derived statistics can be traced back to the published monthly index levels. This is particularly important given the wide range of uses to which the RPI is put including the indexation of state benefits and index linked gilts.

Since the Technical Manual was published the range of uses of the RPI has been reduced in favour of the alternative CPI, as will be discussed in the next post.

A Price Index Peculiarity

Inflation is a current worry in the UK, and the method of measuring it has also been attracting attention because the Coalition decided last year to use the CPI (Consumer Price Index) instead of the RPI (Retail Price Index) as the basis for increasing various benefits and pensions.

Every month the Office for National Statistics (ONS) publishes a bulletin of consumer price data. The figures which get the most media attention are not the actual indices but the percentage changes over 12 months eg “Annual inflation as recorded by the retail prices index (RPI) stands at 4.8 per cent in December, up from 4.7 per cent in November.”

(Boring bit) The percentage change in month “m” over the same month a year ago “m-12” is simple to derive from the indices by the formula:

( Index for month m – Index for month (m-12) / Index month (m-12) ) x 100

or to put it more simply, if the index is 220 now and was 200 a year ago, the percentage change is:

(220 - 200) / 200 x 100 = 10%

Table 2 of the ONS Statistical Bulletin December 2010 gives the RPI and CPI data for the last 36 months. Using the ONS index data and the formula above, the percentage changes for the RPI for the last 24 months are easily calculated using Excel – not surprisingly these come out to be the same as the figures printed in the Bulletin.

Now here’s the odd thing. As the table below shows, for the CPI data eight times in the last 24 months the ONS figure is 0.1% higher than the calculated one. For these cases the calculated percentage is also shown with a second decimal place – which doesn’t provide any explanation.  If anyone can cast some light as to why this is happening with the CPI but not the RPI, please add a comment!

ADDENDUM: For the explanation see my post on 3 April 2011: http://bit.ly/i4mV6g

One in Five, One in Six, Whatever

It’s a boring time of the year so any news is eagerly seized upon, particularly if it seems good. On 30 December 2010 the BBC ran a story, Nearly one in five UK citizens 'to survive beyond 100':

Nearly one in five people currently in the UK will live to see their 100th birthday, according to the government. The Department for Work and Pensions (DWP) said its figures suggested 10 million people - 17% of the population - would become centenarians.  These are based on Office for National Statistics population projections and life expectancy estimates.”

But hang on, the headline in the Daily Mail next day was One in six will live to be 100, although their article quoted the same 17%. Other reports were also divided between “one in five” and “one in six”.

This was largely a fractions vs percentages problem: 17% is nearly 20% which is one in five, isn’t it? – No, and see attempt-to-be-helpful table below – but it is also worth following the story back.

The DWP press release said, “More than ten million people in the UK today can expect to live to see their 100th birthday – 17 per cent of the population”, which was picked up by the media. This statistic came from a DWP report, Number of Future Centenarians.  DWP’s interest is, of course, how to find pensions for all these people, and they based their analysis on the ONS projections. As usual, the underlying caveats get lost sight of:

... the population levels and age structure that would result if the underlying assumptions about future fertility, mortality and migration were to be realised. Projections are uncertain and become increasingly so the further they are carried forward.

I wonder whether the assumptions about future mortality are taking current trends in obesity (and consequently Type 2 diabetes etc) into account.  Apart from that, it is informative to go into the statistics in the report. The source of the 17% is this data:

So the 17.3%, correctly reported as “one in six” rather than “one in five”, is an average for males and females. However most of us are one or the other, and for females 20% (19.98%) is almost exactly “one in five”, but for males 14.5% is, alas, more like “one in seven”.

Of course, we’re not only broken down by sex, but by age as well. A one-year old female in 2010 is considered to have a 32.8% (1 in 3) chance of reaching 100, but a male of Western Independent’s age has only a 1 in 12 chance. So read this blog regularly while it lasts!

(for percentages with one decimal place and rounding to smaller fraction)