UK inflation measure to include housing costs

Posted on November 10, 2016

The Office for National Statistics is changing its headline measure of inflation in March in an attempt to encourage organisations to switch to one that it considers is the best available in Britain.

From March, the statistical agency, which is independent of the government, will shift most of its focus in reporting inflation from the current CPI figure to a modified CPIH figure that includes estimates of the housing costs of homeowners.

In the most recent data, the shift would have raised the headline inflation measure from 1 per cent in September under the CPI measure to 1.2 per cent, calculated using CPIH.

Very few organisations use CPIH in research or to help set wages, calculate the value of index-linked bonds, set pensions, repayments of student loans or set regulated prices such as rail fares or water bills. The ONS hopes that its move will encourage wider use of CPIH.

“There is a chicken and egg problem,” said Jonathan Athow, the ONS’s director-general of economic statistics. “We are confident this is the best measure”.

He acknowledged there is a risk with the move because CPIH has recently been stripped of its status as a “national statistic” because of errors and conceptual difficulties in measuring private sector rent changes, which are used as a proxy for the housing costs of owner-occupiers.

Mr Athow said he hoped the UK Statistics Authority would soon return the “national statistic” kitemark to CPIH, but added that the ONS would push ahead with the change regardless of its status, something the ONS had previously pledged to avoid.

But in a blow to the ONS’s hopes, the Treasury has indicated it has no plans to stop issuing index-linked gilts that track the old RPI despite its formula overstating inflation, nor has it any current plans to ask the Bank of England to target CPIH instead of the current 2 per cent CPI inflation target.

Some researchers, who have not used CPIH in the past, welcomed the change to include housing costs for homeowners. Matthew Whittaker, chief economist of the Resolution Foundation, said the switch would change the picture of income growth.

“Once CPIH has proved itself worthy of national statistic status it makes sense to establish this as the default measure of inflation for use by government and researchers alike,” he added.

Although other countries, such as the US, have long used private sector rents to estimate the costs of owner-occupation and most European countries include an element of house prices as a proxy in their domestic inflation measures, Britain has stood out in having a domestic headline measure that ignores owner-occupied housing entirely.

In CPIH, this element will comprise 16.5 per cent of the whole inflation measure, showing the importance of housing costs in British households’ expenditure. In recent years, however, CPIH has closely tracked the CPI measure, but it is currently higher.

To appease critics of CPI and CPIH who point out that these are largely economic measures that do not take into account the money spent month-by-month on mortgages, the ONS also confirmed it would push ahead with a new Index of Household Payments which it would seek to publish by the end of 2017.

With a proliferation of new measures of inflation, it added that it would delete a series of now little-used inflation measures, including RPIJ, the tax and prices index and the RPI pensioners’ index.

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