Inflation (eBook)

Robert O’Neill is Lecturer at the University of Huddersfield, UK, where he has been since 2013. Previously he worked at the Office for National Statistics working primarily in the area of index numbers methodology. His current role includes both research and teaching related to quantitative economics, which includes teaching students at various levels.Jeff Ralph has worked for the Office for National Statistics, UK, for 13 years. Much of that time has been spent working on price statistics and the measurement of inflation; this has included research and teaching. Jeff has been joint author on a number of research papers and lead author on a recent student textbook on index numbers. Paul A. Smith is Associate Professor in Official Statistics, University of Southampton, UK. He worked for 25 years in the Office for National Statistics, UK, where he gained extensive experience in the theory and practice of sample surveys applied to businesses, households and the population census. He undertakes consultancy and research in topics related to official statistics, and coordinates the MSc in Official Statistics.

Inflation 2
Preface 5
Acknowledgements 12
Contents 14
List of Figures 20
List of Tables 21
1 Introduction 23
1.1Price Levels and the Value of Money 25
1.1.1Inflation as an Economic Indicator 26
1.1.2Inflation as Affecting Businesses 26
1.1.3Inflation as Affecting Individuals 27
1.1.4The Development of Inflation Adjustment 30
1.2Measuring Inflation 32
1.2.1The Early Development of Inflation Measures 33
1.2.2The First Half of the Twentieth Century 33
1.2.3Towards a Modern Measure of Inflation 34
1.2.4Changes in the Methodology 36
1.2.5Reviews and Housing 37
1.3The Future of Inflation Measurement 39
1.4The Long Road to the Current State 39
References 40
2 What Is Inflation? 43
2.1Why Does Inflation Matter? 44
2.2The Language of Inflation 44
2.3The Role of Inflation in Monetary Economics 46
2.4Is Inflation Bad? 48
2.4.1The Rise of Monetarism 51
2.4.2Hyperinflation 54
2.5Some Questions About Inflation 56
2.6The Common Uses of Inflation 58
2.7Why Is an Accurate Measure of Inflation Important? 60
2.8Perceptions of Inflation 60
2.8.1Investigating Perceptions of Inflation 61
2.8.2Personal Inflation Calculators 62
2.8.3German Index of Perceived Inflation 62
2.8.4Official vs. Perceived 62
2.8.5Variations of Inflation Across Households 63
References 63
3 The Origins of Inflation Measurement: 1700–1879 66
3.1Overview 67
3.2Measuring Price Changes 68
3.3The Origins of the Basket 69
3.4Early Price Index Formulae—Dutot and Carli 72
3.5Indexation in 1780—The American War of Independence 73
3.6An Early Attempt at Measuring Price Levels Over Time 74
3.7The Quality of Price Information and the Use of Weights 76
3.8Towards a Solid Foundation 77
3.9A Geometric Approach 80
3.10Laspeyres, Paasche and Drobisch 81
3.11Early Price Data 83
3.12The Development of Official Bodies for Price Statistics 84
3.13The Pace of Development 85
References 86
4 What Is a Price Index? 89
4.1Defining a Price Index, Inflation and Index Numbers 89
4.2The Potential Inputs to Index Numbers Calculation 92
4.3Some Popular Index Numbers Formulae 93
4.3.1The Index Number problem 93
4.3.2Unweighted Index Numbers 95
4.3.3Weighted Index Numbers 97
4.3.4Symmetrically Weighted Index Number Formulae 101
4.3.5Returning to the Index Number Problem 104
4.4Differences in the Estimation of Inflation 106
4.5Conclusions 108
References 109
5 The Development of the Cost of Living Index: 1880 to 1946 111
5.1Price and Expenditure Series Before 1880 113
5.1.1Price Information 113
5.1.2Early Official and Private Inquiries into Household Expenditure 114
5.2The Political Imperative 116
5.3The Board of Trade Enquiries of 1903 117
5.3.1Report 1: Wholesale and Retail Prices 117
5.3.2Report 2: British and Foreign Trade and Industrial Conditions (Cd 1761) 118
5.3.2.1 Expenditure on Food 119
5.3.2.2 Clothing and Rent 121
5.3.3An Early Cost of Living Index Series 121
5.4The 1904 Household Expenditure Survey 123
5.4.1The Sample and the Data Collection 124
5.4.2Items of Food 125
5.4.3Rent, Clothing, Fuel and Light 126
5.4.4Cost of Living Index Numbers 129
5.5The 1908 Report—Report of an Enquiry into Working-Class Rents, Housing and Retail Prices 130
5.5.1Rents 132
5.5.2Prices for Food and Fuel 132
5.5.3Creation of Index Numbers 132
5.6The 1913 Report—Report of an Enquiry into Working-Class Rents and Retail Prices 133
5.6.1Changes in Prices Across Regions 134
5.6.2Extended Price Index Numbers 135
5.7First World War 138
5.7.1Cost of Living During the War 138
5.7.2The Sumner Committee 139
5.8The Methodology of the Cost of Living Index Numbers 141
5.8.1The Purpose of the Index 141
5.8.2The Expenditure Weights 142
5.8.3Price Collection 142
5.9Indexing Arrangements After the War 144
5.10The Second World War 146
5.11Conclusions 147
References 148
6 The Development of the Retail Prices Index: 1947–1989 151
6.1Overview 151
6.2After the War 152
6.3The Cost of Living Advisory Committee 154
6.4The Interim Index of Retail Prices 156
6.5Wider Uses of Budget Enquiries 158
6.6Report of the Technical Committee 158
6.7The 1953–54 Budget Enquiry 160
6.8The Introduction of the New Index 161
6.9Updating the Expenditure Weights 163
6.10Meals Out, Housing and Further Indices 165
6.11Mortgage Interest and Owner Occupiers 169
6.12Three-Year Weights to One-Year Weights 171
6.13Major Structural Changes in 1986 171
6.14Alternative Inflation Measures 173
6.14.1Pensioner Indices 173
6.14.2RPIX and RPIY 174
6.14.3Tax and Price Index 174
6.14.4The Rossi Index 175
6.15Responsibility for Producing the Index 175
6.16The Retail Prices Index Over the Period 1945–1989 176
6.17Final Remarks 177
References 177
7 What’s in the Basket? 179
7.1Why Do We Need the Basket? 180
7.2The Expansion of the Basket 183
7.3The Role of Items in the Basket of Goods and Services 183
7.4More Than One Basket? 185
7.5Updating the Basket 186
7.6Identifying Potential New Items and Reviewing Existing Items 186
7.7Examples of Changes Over Time 188
7.8Specific Changes for 2017 189
7.9The Commodity Review Process 190
7.10Concluding Remarks 190
References 191
8 Collecting Prices 192
8.1Introduction 192
8.2ONS Technical Manual 193
8.3Historical Methods of Price Collection 194
8.4Current Price Sampling Procedures 195
8.5Collecting from Multiple Shop Types 198
8.6Recording Discounts 198
8.7Hedonic Regression 200
8.8Index Day—When to Collect Prices 201
8.9Sampling Error in Price Measurement 203
8.10Representativeness of the Sample 204
8.11Evaluation of the Sampling Design 207
8.12Hyperinflation 210
8.13International Issues 210
8.14Summary 211
References 212
9 Estimating Household Expenditure Shares 214
9.1Introduction 214
9.2Private and Early Official Inquiries into Household Expenditure 215
9.3The Development of Official Expenditure Surveys 219
9.4The Uses of Household Expenditure Data 220
9.4.1Family Food—From DEFRA 220
9.4.2Family Spending 221
9.4.3Energy Expenditure 222
9.5The Living Costs and Food Survey 222
9.5.1Overview 222
9.5.2Sampling 223
9.5.3Collection instruments 223
9.5.4Fieldwork 224
9.5.5Data processing 225
9.5.5.1 Coding 225
9.5.5.2 Checking 226
9.5.5.3 Weighting 226
9.5.6Response 227
9.5.7Precision 227
9.6Challenges of Capturing Expenditure and Income 228
9.6.1Comparison with Other Sources 230
9.6.2The Johnson Review of Consumer Price Statistics 231
9.6.3Summary of Quality Concerns 232
9.7Quality Assessment of the LCF 232
9.7.1Quality Reviews of Official Statistics 232
9.7.2Summary of Concerns 233
9.7.3A Major Review of the LCF 234
9.8The Future of Expenditure Measurement 235
9.9Conclusions 235
References 236
10 From the RPI to the CPI: 1990–2011 239
10.1Early 1990s–Refinement of the RPI 240
10.2The Adoption of the RPIX as an Inflation Target 242
10.3Further Developments to the RPI 243
10.3.1Council Tax 243
10.3.2Owner-occupied Housing 244
10.4The Initiation of the Harmonised Index of Consumer Prices 245
10.5Changing the Target for Inflation from the RPI to CPI 248
10.6Increased Use of the CPI 251
10.7Consultations: 2009–2011 253
10.7.1Mortgage Interest in the RPI 253
10.7.2Redesign of the Consumer Prices Statistical Bulletin (2010) 254
10.7.3Seasonal Prices (2010) 255
10.7.4Improving the Measurement of Car Prices 255
10.8Conclusions 256
References 257
11 Measuring Inflation at a Detailed Level 260
11.1The Absence of Weights 260
11.2Elementary Aggregate Formulae 260
11.2.1The Carli Index 261
11.2.2The Jevons Index 263
11.2.3The Dutot Index 264
11.2.4Which Elementary Aggregates are Used in the UK? 264
11.3Relationship Between Elementary Aggregate Formulae 265
11.3.1Taylor Series Approximation 266
11.3.1.1 Jevons compared with the Carli 266
11.3.1.2 Jevons Compared with the Dutot 269
11.3.1.3 Carli Compared with the Dutot 272
11.4Which is the Best Elementary Aggregate Formula? 276
11.4.1The Test Approach 276
11.4.2The Economic Approach 277
11.4.3The Statistical Approach 278
11.5Conclusion 278
References 279
12 What Should We Be Measuring? 281
12.1Cost of Living Vs. Cost of Goods 282
12.2What Is a Cost of Living Index? 284
12.3The History of Arguments Around the Cost of Living Index 290
12.4How the Cost of Living Can Change Even if Prices Stay the Same 294
12.5What Do Price Indices Measure? 295
12.5.1Is the CPI a Cost of Living Index? 296
12.5.2The Recommendations of the Boskin Commission 298
12.6Are We Close to a True Cost of Living Index? 299
References 300
13 Recent Developments: 2012–2016 303
13.1Overview 303
13.2Governance 304
13.3The Formula Effect and the RPI Consultation: 2012 306
13.3.1The Origins of the Formula Effect 306
13.3.2The UK Position 307
13.3.3ONS Research into the Choice of Elementary Aggregate Formulae 311
13.3.4Consultation on Improving the RPI 313
13.3.5Overall Conclusions 315
13.3.6Introducing the RPIJ 316
13.4Owner Occupiers’ Housing 317
13.4.1OOH Consultation 317
13.4.2A Recommendation 323
13.4.3The Public Consultation 323
13.4.4UK Statistics Authority Assessment of Consumer Price Statistics 325
13.4.5Concerns About the Rental Methodology 325
13.4.6UK Statistics Authority Re-Assessment 326
13.5The Johnson Review 327
13.5.1Background to the Review 327
13.5.2The Terms of Reference 328
13.5.3Inflation Concepts 329
13.5.3.1 Concept 1: A Price Index 330
13.5.3.2 Concept 2: A Cost of Living Index 330
13.5.3.3 Concept 3: A Household Index 331
13.5.4The Position of the RPI 332
13.5.5Improvements to the Methodology 333
13.5.5.1 Price Quotes 333
13.5.5.2 Expenditure Weights 333
13.5.6Other Methodological Recommendations 334
13.5.7Public Consultation 334
13.5.8Outcome of the Review and the Consultation 336
13.6Concluding Remarks 336
References 337
14 Other Price Indices 349
14.1The Producer Price Index 350
14.1.1Rebasing 355
14.1.2Sampling in PPIs 357
14.1.3PPI Price Collection 359
14.2Import and Export Prices 360
14.3Services Producer Price Index 363
14.4House Price Index 365
14.5Implied Deflators 367
14.6Purchasing Power Parity 367
References 368
15 A Look to the Future 371
15.1Web Scraping 372
15.2Recommendations of the Johnson Review 374
15.3Inflation by Demographic Group 377
15.4Accounting for Fashion 378
15.5Changes in the Weights Used in Index Numbers 379
15.6Who Will Determine the Future? 380
15.7Conclusions 383
References 383
Index 386