Pete appeared on BBC Radio 4 on Friday 13th September talking to Tim Harford on More or Less about how the GDP deflator is a lot lower than CPI/RPI. Pete’s view is that it is because of the way that the government estimates inflation on its own expenditure. It does not use inflation in its costs (like wages) but uses measures of quality (such as the number of GCSE grades A-C) to calculate the deflator.
There is a big problem with this. Over recent years when spending has been capped, apparent productivity (as measured by blunt instruments like GCSEs) has carried on improving. Therefore it looks like government is getting more productivity for each pound spent. This means they have to assume a negative deflator (-1.6% in 2012 for example), to make the books balance.
There is a major impact of this quirk of statistics. It has made GDP look a lot higher than it really is over the last 2-3 years. Indeed, had ONS not used these hedonic adjustments, we’d probably been in recession for a large part of the time of the current government.