The UK Statistics Authority has today published Paul Johnson’s independent review of UK consumer prices statistics. 1 The Authority will consider his recommendations in detail and will undertake a full public consultation in the summer of 2015.

Paul Johnson’s report finds that, other than not accounting for owner occupiers’ housing costs, the Consumer Prices Index (CPI) is a well constructed measure of inflation. Users should have confidence in it. However there is “an unhelpful proliferation of price indices in the UK at present”. He agrees with the view set out by the National Statistician that there are basic statistical flaws in the construction of the Retail Prices Index (RPI) and that the RPI is not a good measure of inflation.

Paul Johnson recommends that:

  • The Office for National Statistics (ONS) should move towards making the Consumer Prices Index including owner occupiers’ housing costs (CPIH) its main measure of inflation;
  • Government and regulators should move towards ending the use of the RPI as soon as practicable and, where they decide to keep using it, the Authority should ask them to set out clearly and publicly their reasons for doing so; and,
  • The Authority and the ONS should, on an annual basis, publish significantly more information about what is happening to prices and costs faced by particular groups of households.

Research carried out in compiling the report indicated that:

  • Different household groups have experienced quite different rates of inflation over the past decade – with poorer households (those with the lowest levels of spending) experiencing significantly higher rates of inflation than richer households;
  • Current inflation measures indicate how much prices rise. But people are likely to change their spending patterns in response to some prices rising more than others – at some point, as the price of apples rises, consumers will switch to other fruits. As a result current inflation measures are likely to overstate the extent to which rising prices make people worse off. Initial analysis suggests that this overstatement may be significant. ONS should publish estimates of this effect; and,
  • There are big challenges in measuring price changes when the nature and quality of goods and services on sale changes. For goods that get “better” over time – anything from vacuum cleaners to televisions – the actual average price can rise much faster than the price index for that good;

The report also makes a number of detailed recommendations regarding the methodology and data used to compile consumer price statistics.

For example, ONS should:

  • prioritise developing new data sources, from the web and from retailers’ own data, to underpin the construction of inflation statistics;
  • introduce regular monitoring of the impact of quality adjustment on its consumer price statistics; and,
  • understand more about how discounting behaviour by retailers is changing over time, and look to include in the inflation measures many more types of discounts (like two-for-one offers) which are currently excluded.

Speaking today, Paul Johnson said:

“In 2013, the UK Statistics Authority de-designated the RPI as a National Statistic and the Office for National Statistics introduced the new CPIH measure to include owner occupiers’ housing costs. In my view, it is time for the UK government to take the next, logical step and stop using RPI in any element of the tax, benefit and regulatory systems.

“I would also like to invite the Authority to consider how it might support better statistical measures of household inflation. Different population groups – the young and the old, families and individuals, home-owners and renters – have different spending patterns and hence face different rates of inflation. An annual publication showing how inflation measures differ between these groups would be most welcome.”

Speaking today, Sir Andrew Dilnot, Chair of the UK Statistics Authority, said:

“The UK Statistics Authority is grateful to Paul Johnson for this landmark report on UK consumer prices statistics which should be seen as an authoritative and comprehensive review of a complex statistical landscape with a number of recommendations which the Authority will want to consider further.

“I have asked the National Statistician, John Pullinger, to consider the review and make recommendations to the Board of the UK Statistics Authority. The Authority expects to launch a formal public consultation in the summer of 2015 and to make our final response later in 2015.”

For further information please contact 07786 892263 or 07730 667013.