On the 9th January the Brutish Broadcasting Corporation reported that there is to be “no change to the RPI [Retail Price Index] calculation” – a key measurement of inflation. The following day the BBC ran another story under the headline “The ONS [Office for National Statistics] puts consistency first.” This story began with the following extraordinary sentence:
“Britain’s Office for National Statistics has decided, when it comes to inflation, it’s better to be consistent rather than right.”
Moments of such radiant clarity by our most venerated media establishments are rare and should be treasured for all they’re worth — for being consistent rather than right perfectly describes the last three hundred years of Brutish politics, at least, although it’s seldom put that way.
But back to the BBC story.
(Incidentally, the precise dates and times these two stories actually appeared are hard to determine as the details on the BBC website appear to conflict with each other. But the dates are about right and are anyway largely irrelevant to this essay.)
The news reports were initiated by the publication of a review by the ONS about the measurement of a vitally important statistic – the rate of inflation. I say “important”, but I have to make clear that my use of the word in connection with this subject is very different to that of our trusted leaders. We both agree it is indeed very important – but for rather different reasons as I shall try to explain later on.
It’s always tempting to glaze over at the sight of words like “statistics” and “inflation”, and although this essay is about the ONS review it is not very technical. It concentrates instead on a few of the social issues it raises.
So let’s begin by taking a quick look at some of the key players involved.
1. Meet The Decision-Makers
A press release by the ONS (3) tells us that the review was carried out by the National Statistician, Jil Matheson. According to the UK Statistics Authority (UKSA), of whose board Ms Matheson is a member, Ms Matheson appears to be a career civil servant with a background in the administration of population censuses and surveys. The press release is quite short and has one or two interesting nuggets of information. The penultimate point in the Background Notes reads:
National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference. (Emphasis added)
I wonder who the “customer” might be for statistics regarding inflation. Customer is a very friendly word. It suggests all of us. Is that what the ONS meant?
Note 7 gives us a clue:
Section 21 of the Statistics and Registration Service Act 2007 requires that:
(2) Before making any change to the coverage or the basic calculation of the retail prices index, the [Statistics] Board must consult the Bank of England as to whether the change constitutes a fundamental change in the index which would be materially detrimental to the interests of the holders of relevant index-linked gilt-edged securities.
(3) If the Bank of England considers that the change constitutes a fundamental change in the index which would be materially detrimental to the interests of the holders of relevant index-linked gilt-edged securities, the Board may not make the change without the consent of the Chancellor of the Exchequer.
It makes perfect sense that the Bank of England might be a legitimate “customer” for information about inflation, but then so are Mr and Mrs Average Worker. But as we shall shortly see, Mr and Mrs Average Worker have no representation on the UKSA board – let alone any control of changes the Board may want to impose. And if National Statistics are “produced free from any political interference” why must the Board be prepared to wait on the “consent of the Chancellor of the Exchequer”?
The ONS press release tells us (in note 6) that on the day before the publication of the review Ms Matheson met with the Consumer Prices Advisory Committee (CPAC) for “advice… [in] making her recommendation”. According to the ONS: “CPAC membership is drawn from the UK Statistics Authority, ONS, the Bank of England, HM Treasury, academia, the media, and consumer organisations.”
The good old Bank of England again. We’re not sure who the “consumer organisations” might be, or how influential. One suspects, however, that if they think any changes might be detrimental to the interests of consumers they’re unlikely to be able to whisper their concerns into the ear of the Chancellor of the Exchequer – and even if they could it’s unlikely to have much effect.
The UK Statistics Authority is quite forthcoming about the actual individuals that control it. Ten names are given. Broadly speaking, the board could be said to comprise three academics, three civil servant statisticians, two people with banker/City-type backgrounds, a social worker and a media man.
Conspicuously absent from either board (in addition to Mr and Mrs Average Worker of course), is a trade unionist – not that I personally have any more confidence in the trade union hierarchy than I do any other hierarchy – but TU representation is surely at least as relevant as that of academia.
The presence of the media man, David Levy, is moderately interesting. Mr Levy appears to have a background with the BBC – the unofficial government propaganda arm. Why might he be there? One can obviously see the point in having a PR section somewhere in the organisation – but on the board of directors?
2. The Review1
The first question that sprang to my mind when I learnt about this review is why it was done. The second paragraph of the ONS press release tells us it “was prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI).”
This gap is caused by something called the “formula effect”, which “does not meet current international standards”
So it would seem that the review was done because of the differences between how inflation is measured. But why should that matter? Some people like to measure length in metres and others like to use feet and inches. As long as you don’t try using both methods at the same time there’s never usually a problem; so why should we care which method is used to measure inflation?
According to paragraph 21 of the review Britain has been using the RPI to measure inflation since 1947. The CPI appeared on the scene in 1996 in response to a new EU directive; and in 2003 Chancellor Brown decreed that the UK’s inflation targets would be measured by the CPI – but pensions, benefits and index-linked gilts would continue to be measured by RPI. Then in 2011 the government announced that it would start using the CPI for pensions etc as well. But the RPI is still being used for some important purposes – such as adjusting some private pensions, index-linked government bonds and the prices set by some privatised utilities.
c. Differences between RPI and CPI
The review describes a few of the main differences between RPI and CPI, such as the fact that the two indices count things slightly differently. The RPI excludes very high and low income households, for example; and the CPI excludes owner occupiers’ housing costs.
The review also mentions that the two systems use a different arithmetic tool in that RPI uses an arithmetic mean whilst the CPI uses the geometric mean. At first glance that starts to look pretty boring, but it’s actually quite significant.
If you take a series of numbers and add them up, and then divide the answer by the number of numbers used you will arrive at the arithmetic mean. If you take the same set of numbers and multiply them together, and then take the nth root (where n is the number of numbers used) you will arrive at the geometric mean. So far so boring; but if you do it a couple of times, using different sets of numbers, you’ll notice a rather curious thing: the geometric mean is nearly always smaller than the arithmetic mean. I couldn’t see where the review told you that; but guess what, the eventual recommendation of the ONS included making more use of the geometric mean than it does at present (see ONS press release, second paragraph: “Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.”)
The review did go on to talk about other differences – such as the cost of housing and the cost of clothing – which are not insignificant.
The review paper also discussed the statistical models of Carli, Dutot and Jevons – all of whom had slightly different opinions on how inflation should be measured. However, it turns out that instead of conforming to the model of one or the other, the authorities use another sort of shopping basket where they cherry-pick different bits of each. So, we’re told, the RPI is measured with the following combination of opinions:
Carli – 27%; Dutot – 29%; Jevons 0% and “Other weighted formula” – 43%.
CPI, on the other hand, is measured like this:
Carli – 0%; Dutot – 5%; Jevons – 63% and “Other/weighted formula” – 33%.
d. The clothing factor
The review seems strangely obsessed with the price of clothing, and there’s no explanation for why clothing is deemed more relevant to a discussion on inflation than the price of food say, or motorcars. But perhaps more important is the fact that the points the review does make about clothing don’t seem to make much sense. For example, in paragraph 32 we learn that
[The diagram below] shows that, between 2001 and 2009, annual clothing and footwear prices in the CPI fell by 5.3 per cent on average, while in the RPI, they fell by 2.5 per cent on average. In 2011, clothing and footwear prices in the CPI rose by 2.3 per cent a year on average, while in the RPI they rose by 11.5 per cent.
I’m not sure if the ONS was looking at a different picture, but the one they provide, shown above, doesn’t conform at all to the description they give. The two curves are almost mirror images of each other, except towards the end – and even then they’re quite similar. We cannot see an average 5.3 % fall in prices between 2001 and 2009, and we cannot see the 2.3 and 11.5 % rises (a year…?) in 2011.
e. Review Summary
The review is a curious piece of work. The opening sentence of the ONS press release reads: “Following a consultation on options for improving the Retail Prices Index (RPI), the National Statistician, Jil Matheson, has concluded that the formula used to produce the RPI does not meet international standards and recommended that a new index be published.”
We don’t see anything in the paper that tells us what these “international standards” are, who they’re set by or why we must conform to them. Although we do see a brief explanation of the differences between RPI and CPI we’re not supplied with any evidence that some new measurement is going to be any better – nor for whom it’s going to make things better.
3. The pay-packet effect
The real significance of inflation is the relationship between price rises and pay rises. If prices are rising at 5% a year say but your pay is increasing by 10% a year you wouldn’t care less about the rate of inflation. But if the numbers were the other way around – prices rising at 10% compared with your 5% pay rise, you would care very much.
- I looked at the annual reports of three large public companies. I chose these companies, more or less at random; but I did want to use companies that were directly relevant to the daily life of Mr and Mrs Average. So I picked a supermarket, a water company and a gas company: Sainsbury’s the supermarket giant, Anglian Water Company and British Gas. I looked at the reports for the years 2004 and 2012 (2011 for British Gas as the 2012 report is not yet public). I looked at the figures showing the most highly paid executive in each of these companies.2 This is what I found:
2004 Top executive paid £1.22 m
2012 Top executive paid £3.37 m (176% increase)
2004 Top executive paid £434,000
2012 Top executive paid £1.02m (135% increase)
2004 Top executive paid £1.48m
2011 Top executive paid £2.45m (74% increase)
(This figure is not given in the report. The report shows an amount of £490,000, but suggests this is 20% of the total payment made.)
These numbers show that the top executives of these companies have seen their pay increase by a modest 74% to a rather more generous 176%, an average pay rise for these men (and they are, of course, men) of 128.3%. There’s no reason to think these increases for top executives are in any way exceptional, and are probably moderate compared with pay increases doled out to senior executives in the banking sector and other financial services.
At the other end of the pay scale to chief executives is the national minimum wage (NMW).
The figures provided by the Low Pay Commission3 show that through most of 2004 (NMW changes on 1st October each year), the NMW was £4.50 an hour. By 2012 it had risen to £6.08 an hour – an increase of 35%. The average annual increase of the NMW for this period was 3.6%.
The average annual rate of inflation in the UK for this period was 2.9%.4
So because changes to the rate of inflation are closely mirrored in changes to NMW, whilst there’s absolutely no obvious correlation between inflation and top executives’ pay rises, it’s fairly clear to see that changes to inflation rates are considerably more relevant to those on NMW.
About four years ago I showed that the so-called “shopping basket” used by the statisticians to calculate the rate of inflation is about as relevant to the lives of Mr and Mrs Average as the changing prices of Bugatti Veyrons. This latest review by the ONS does absolutely nothing to address the real economic injustice of inflation. It proposed four “options for change” – none of which are significant to the lives of Mr and Mrs Average. They’re like so many of the rigged choices we’re now used to in our rigged system of government: you can have any colour you like so long as it’s black. The ONS review is indeed exactly as the BBC reported it: “consistent rather than right”. Given that Mr and Mrs Average have no significant representation on the board of UKSA, and given that the Bank of England has a virtual right of veto over the board’s deliberations, should we be surprised that the ONS review is of absolutely no use to Mr and Mrs Average – except for the evidence it provides of how they’re being shafted? I think not.
It’s a crying shame that the trade union movement hasn’t latched on to this sham of rigged inflation rates – which is arguably more scandalous than rigged LIBOR rates, as rigged inflation affects the most vulnerable more than LIBOR. Without an effective TU movement where else can Mr and Mrs Average Worker turn?
In paragraph 20 of the review we’re told, correctly, that the RPI and CPI “do not measure the cost of living”; and that goes to the very heart of the problem, because for all practical purposes that’s exactly how the rate of inflation is used – as an indicator of the cost of living – even though the statisticians themselves admit that isn’t what it does. As my earlier essay showed, the actual cost of living for Mr and Mrs Average is probably four to five times higher than the rate of inflation, but the ability of Mr and Mrs Average to cope with the rising cost of living is constrained by a relentlessly low inflation rate which is used to assess their meagre pay raises.
The government-produced rate of inflation (policed by the Bank of England) is a cynical sham – yet another tool to keep us economically oppressed and in ignorance of the truth. What Mr and Mrs Average need is a meaningful measurement of the actual cost of living which, as the ONS review confesses, is not what we get.
- See pdf download. [↩]
- a. Sainsbury’s 2004 AR.
b. Sainsbury’s 2012 AR.
c. Anglian Water 2004 AR.
d. Anglian Water 2012 AR.
e. British Gas 2004 AR.
f. British Gas 2011 AR. [↩]
- %age increase in National Minimum Wage 2004-2012
2004 – 7.78%
2005 – 4.12%
2006 – 5.94%
2007 – 3.18%
2008 – 3.80%
2009 – 1.22%
2010 – 2.24%
2011 – 2.53%
2012 – 1.81% [↩]
- Rate of inflation in the UK 2004-2011
2004 – 3.0%
2005 – 2.8%
2006 – 3.2%
2007 – 4.3%
2008 – 4.0%
2009 – -0.5%
2010 – 4.6%
2011 – 5.2%. [↩]