Not so Little England

The December 2015 issue of Prospect magazine seems particularly exercised by the possibility that the UK could leave the European Union. Anatole Kaletsky tells readers that “Leaving Europe could be the biggest diplomatic disaster since losing America” – An ugly divorce. Peter Kellner, President of pollster YouGov, warns that “It cannot be taken for granted that voters will keep Britain in the EU” and Edward Docx (Word ® users should resist reading that as edward.docx) thinks that the “in” campaign is faltering, while the “out” campaign has the benefit of Dominic Cummings, who he describes as “ferocious, committed, unafraid, serious, passionate and utterly certain of his cause”. In his article, called The problem with the EU Debate? The “In” campaign… and the “out” campaign on the Prospect website and Nigel Farage’s Dream in the magazine*, Docx warns:

Make no mistake: in less than a year, Great Britain could be out of the EU and no longer Great or, indeed, Britain. David Cameron’s departure will surely follow Brexit, which will also be followed by Scotland’s attempted split from Britain. The splenetic strain of the Conservative Party will be left running Little England—for that is what we will be—and its business for decades to come will be the treaty-by-treaty renegotiation of our relationship with every other country in the world.

Perhaps he’s right, but just how small would this “Little England” be? To answer that, it first has to be defined and presumably for Docx it would consist of the UK less Scotland, that is to say, the countries of England, Wales and Northern Ireland.

In terms of area, he clearly has a point as the table above shows. During the discussion of Scottish independence in 2014, rUK, (r meaning rump, residual or ‘rest of’), was used rather than Little England, so for brevity I will use it here. rUK has only 68% of the area of the present UK, something which would be reflected in comparisons with the other major EU countries (and the USA):

The UK is the 8th largest EU country (of 28) in terms of area, between Italy and Romania. Curiously, rUK would still have been 9th between Romania and Greece. Scotland would be 15th between the Czech Republic (up to 14th in rUK’s absence) and Ireland. However, in population terms, because Scotland has only 8% of the UK’s people, the difference is rather different, as the next table shows:

So, within the EU, where UK is 3rd largest between France and Italy, rUK would have only dropped to 4th between Italy and Spain. Scotland on its own in the EU would be 19th between Slovakia (up to 18th in rUK’s absence) and Ireland.

Another way of presenting these conclusions is to plot population size against area as below. This shows that rUK would have remained one of the handful of EU countries with a population over 20 million, while Scotland would join the ‘shrapnel’ of over 20 smaller ones. Of course, the disproportionate influence of these countries in terms of their population is an important aspect of the EU’s democratic deficit. It might also explain in part why EU membership would be so attractive to an independent Scotland.

While on the subject of population, the UK Office for National Statitics (ONS) has recently published its projections to 2035. As the table below indicates, if Scotland were to become independent by 2025, the rUK population would be 5.6 million lower than the UK’s would have been. However, by 2035 rUK’s population has increased to the same level as the UK’s had been 10 years earlier.

Even more instructive are the equivalent Eurostat projections out to 2080. By 2050, the UK has become the most populated country in Europe. However, so would be rUK by 2060 – hardly “Little England”. (This table is calculated assuming that Scotland’s population remains at the same percentage of the UK’s from 2030 onwards, whereas the ONS figures show a downwards trend from 2015 onwards).  The quality of life in such a densely populated country as rUK (essentially England) will become is also likely to be on a downward trend.

Finally, and probably most importantly for many who will vote in the Brexit referendum: perceptions of the economic benefits of leaving the EU. The chart below, again from Eurostat, shows GDP per capita in PPS**relative to the EU’s overall 100. Many people would expect rUK to be better off than the UK, which now makes net payments to the EU while rUK is making transfers within the UK to Scotland. Conversely, Scots could be expected to be worse off. Perhaps the “in” campaign, rather than worrying about “Little England”, should concentrate on disproving this expectation – if they can get their arguments past Dominic Cummings.

* On Docx’s own website, it’s called Are we Sleepwalking to Brexit?

**According to Eurostat: “Gross domestic product (GDP) is a measure for the economic activity. It is defined as the value of all goods and services produced less the value of any goods or services used in their creation. The volume index of GDP per capita in Purchasing Power Standards (PPS) is expressed in relation to the European Union (EU28) average set to equal 100. If the index of a country is higher than 100, this country's level of GDP per head is higher than the EU average and vice versa. Basic figures are expressed in PPS, i.e. a common currency that eliminates the differences in price levels between countries allowing meaningful volume comparisons of GDP between countries. Please note that the index, calculated from PPS figures and expressed with respect to EU28 = 100, is intended for cross-country comparisons rather than for temporal comparisons."

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