Monthly Archives: October 2015
On September 1st, ONS published the results of a trial to scape food prices daily from the internet (see discussion here). These resulted in headlines such as: “costs rocketing”; “cost of basic items has risen by 8% in last year”; and “spaghetti up 20% in a year”. Yesterday, ONS put out a correction saying that they had got the scale inverted and that food prices had actually fallen by 3% a year – a figure now almost the same as the -2% decline in prices seen in CPI.
Pete Comley, of the website Inflation Matters, said: “I pointed out this error to the ONS in early June after they published some initial findings on the web data trial. It looked so obviously wrong to me. Despite this, ONS went on to publish more data with the error in September and have only now admitted to the mistake.”
He continued: “This miscalculation comes after other major revisions to the results between June and September. ONS’s initial analysis created headlines of inflation being potentially over-estimated versus CPI. In September they created the opposite headlines. Such mistakes undermine the public confidence with other pricing statistics such as CPI and RPI. There should be better quality control procedures in place at the ONS. They should at least apply the old sense check of: if it is interesting, it is probably wrong.”
Comley was concerned what the long-term impact of this error might be: “The collection of prices online could have a lot of benefits not just to the ONS but to the public by providing more timely and detailed price indices. It would be a shame if this opportunity for development of our price indices is wasted due to basic errors in a trial.”
The trial referred to involved ONS collecting prices of 35 foods and drinks automatically from Tesco, Sainsburys and Waitrose websites between June 2014 and June 2015. Some 6500 prices were checked every day and a daily chained-linked price index created and compared with changes in average unit prices paid (of the items that could be checked each week). The error occurred in the chain-linking causing price declines to be stated as rises, and vice versa. In addition, ONS also appear to have made some other revisions to their chain-linked data.
A summary of some of the key data published in September (and reported widely) and the latest revisions are:
|Original chain-linked inflation est.||Revised chain-linked inflation est.||Unit price change inflation est.|
|All food and non-alcoholic drinks||+8%||-3%||-3%|
|Red wine bottle||+14%||-11%||-4%|
|Cola drink 2 litre||+14%||-2%||0%|
|Cheddar per kg||+14%||-10%||-6%|
|Fresh orange juice||+9%||-4%||-1%|
|Plain biscuits 2-300g||+8%||-6%||-1%|
|New potatoes per kg||+7%||-6%||-2%|
Link to the full ONS corrected report: http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/research-indices-using-web-scraped-price-data/index.html
Link to a copy of the original ONS report can be found at: http://inflationmatters.com/is-inflation-really-8-ons-web-scraping-trial-problems/
The September inflation figures showed CPI inflation dipping below zero again (-0.1%) as we predicted last month. This was mainly due to the anticipated reductions in petrol and gas prices. However it was also affected by lower rises in costs of clothes than is normal in September.
RPI witnesses an even steeper decline to 0.8% (from 1.1%) – probably on account of the greater impact that clothing price changes can have on this index, due to the method of calculation. See discussion here.
An unusual September
The latest data are very unusual. September (and August) are usually months when prices rise, no matter what is going on in the economy. One of the drivers for this is retailers returning prices to normal after the summer sales and setting them at full levels in the run up to the Christmas peak. In more recent times, it has also been the period when the regular increases in education fees get reflected in the data.
But this September was different. CPI has never gone down in this month since its inception in 1998. Further, you have to go back as far as 1985 to see RPI decline then (except in the very strange 2008 when house prices were in free fall.) The reason they fell this time is related to global factors of declining oil prices and probably the impact of the China slowdown beginning to be felt e.g. on clothes prices.
Divergence between goods and services grows
September also saw the size of the gap between goods and service inflation reach double its normal level. Since the inception of CPI, service inflation has been on average 2.4% higher than goods inflation. In September 2015, goods inflation stood at -2.4% and service inflation was +2.5%, i.e. nearly 5% difference.
I have discussed the causes of this many times before. Global commodity prices and competitive devaluations are dragging down the price of goods, whilst services are being pushed up by increasing wages, monopolies and government regulation. Take a look at some of the highest rises in services:
- 9.1% education
- 4.1% recreation/sport
- 3.8% domestic and household services
- 3.7% accommodation
- 3.5% social protection
- 3.2% hospital services
The latest data on average weekly earnings show them to be rising at 3.4% (without bonuses) – and this rate is even higher within the private sector. This suggests that service sector price rises may well rise further in the coming year as the slack in the economy tightens and these higher wages drag inflation up again. We also have to factor in the cost of higher pension contributions that many employers are now being forced to pay their staff.
Outlook: The only way is up
I predict that these September stats will mark the long term low for CPI/RPI that we may well not see again for a number of years to come in the UK. Apart from the effects of wages on services alluded to above, the primary reason for this is that gradually the declines of goods prices witnessed over the last year will fall out of the calculation from November onwards.
Next month’s stats will probably show CPI near zero still. Remember petrol has declined another 2p/litre since today’s stats were calculated. However beyond there, the direction of travel is firmly up. When January’s inflation figures are published, it is likely that CPI will be back above 1% and RPI above 2%. What happens during the rest of 2016 may depend a lot on China and whether the UK raises interest rates. Without any negative impacts from those factors, it would not be surprising to see CPI almost back to the 2% target by the end of next year.
The full ONS stats can be found here.