The methodological development work on consumer prices carried out by the ONS in 2012 has been focused on two key areas: the inclusion of owner occupiers’ housing (OOH) in a new index of consumer prices; and, addressing the increasing impact during 2010 and 2011 of the ‘formula effect’ on the gap between the CPI and RPI.
Owner occupiers’ housing costs are currently excluded from the CPI. The ONS has developed a number of experimental OOH indices, using the net acquisitions (NA) and rental equivalence (RE) approaches. In April 2012, the Consumer Prices Advisory Committee (CPAC)a recommended that the RE approachb should be used. The National Statistician has recommended that a new index should be published using this approach and this will be done alongside CPI from March 2013.
The ‘formula effect’ occurs as a result of the use of different formulae to aggregate prices at the basic level in the CPI and RPI. In 2012 it accounted for around 0.9 percentage points of the difference between the two measures, compared to around 0.5 percentage points before 2010. The ONS initiated a work programme to address this issue.c This concluded that there is no perfect formula to use at the lowest level of price aggregation, but argued that the use of the ‘Carli’ formula in the RPI was no longer appropriate because of its susceptibility to ‘price bounce’. ONS also concluded that economic theory cannot be used to guide the appropriate choice of formula at the elementary aggregate level.d
he National Statistician has now launched a public consultation seeking views on options for change to the methodology used in the RPI.e CPAC will meet following the public consultation, after which the National Statistician may put forward a recommendation to the UK Statistics Authority.
The Bank of England would be consulted on whether any proposal would be a fundamental change to the basic calculation of the RPI that would be materially detrimental to the interests of holders of relevant index-linked gilts. If the Bank considers this to be the case, then the agreement of the Chancellor of the Exchequer would be required before the change could be made. Subject to the above, the ONS would introduce any change in March 2013.
An announcement on the recommendation by the UK Statistics Authority is not likely this year. As such, we have not taken into account any possible methodological changes to the RPI formulae in our forecast.