The FT has noted:
The UK's top statistician has said the nation should focus its attention on a little-used measure of inflation that includes housing costs, instead of overwhelmingly concentrating on CPI and RPI.
In a letter to the UK Statistics Authority, John Pullinger, national statistician and head of the Office for National Statistics, promised to pump resources into improving the CPIH measure, which takes account of owner-occupied housing costs such as mortgages and insurance.
It would become “focal point of ONS commentary in due course”, he said.
Three points. First, does the Bank of England agree for inflation targeting purposes?
Second, is this a precursor to falling house prices, which many expect (although which dopes not seem to be happening in the South East a yet)?
Third, if this measure becomes negative for reason of falling house prices what will the implication be? Pensioners are protected by the triple lock for now. But what of everyone else?
Much as I see the relevance of taking house prices into consideration I also see enormous problems when many have little control over changing their costs, barring moving, which in itself is enormously expensive.
Has anyone thought the policy implications of this through?
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It’s an interesting one: on the one hand, housing costs – rents, especially – have a huge impact on consumption. And, with the increasing pressure on the middle classes, on investment.
So this is an important component of inflation; or rather: deflation.
But what about the people on the other side of that transaction – those receiving rents?
Rising rents depress consumption and productive investment; but the beneficiaries direct their rents into inflating asset-price bubbles.
So the arguments on both sides are both right and wrong, and rather more intelligence needs to be applied in using cost-of-living data in our economic policies.
Given that house price rises vary hugely across the country how would that work?
Another issue
But all prices vary across the country, in fairness
Indices are only ever approximations
I remember many years ago learning the relevance to using a “balanced scorecard” to try to measure board performance (to avoid blinkered corporate thinking at the time).
So where is the economists balanced scorecard of measures that provide an insightful and realistic measure of UK performance?
And what should it include?
It has long struck me that ignoring the biggest component of household budgets when measuring inflation is nonsensical, especially when for example it is influencing decisions on levels of benefits. However, I’d fully accept that it needs thinking through carefully to work out the unintended consequences but surely that has to be the right direction to move in. Pretending that we have near zero inflation when housing costs are to coin a phrase, going through the roof, is just putting our heads in the sand.
Arguably, it is also a factor in inequality – wealthier, property owners benefit from property inflation and tend not to have incomes that are tied to inflation indexes. Those further down the ladder, paying soaring rents and being dependent on indexed benefits or wages that are kept low on the excuse that inflation is low, get clobbered
Having worked for the outfit that invented ‘balanced scorecard’ many years ago, its as relevant in this context as in many others. Sadly, since we started using it 25 or so years ago, the financial/shareholder dimension has come to dominate completely, the opposite of what was originally intended
Of course Robin, you mean the captured version of the balanced scorecard concept that our lovely global consulting friends promoted to their clients as a great way to show that they “cared” for their employees – while at the same time outsourcing their jobs overseas, replacing people with technology at every opportunity and introducing new forms of employment contract to undermine as many rights as possible.
It was at this point in my career that the light bulb truly came on in my head! It is not possible to reform capitalism, it can only be radically restructured in terms of changing the ownership model for there ever to be real and lasting change.
It certainly got captured by big consulting firms – as did the small firm I worked for (by KPMG) until we all very quickly left. I barely recognise what I now see as balanced scorecard
As originally conceived we were using it to try and get a balance between financial measures, and other equally important measures of organisational success and progress. Back then the people we were working with did recognise a wider range of stakeholders than just the shareholders, and that included both employees and the wider community. The balance was about stakeholders and hence measures. The belief that there was only one stakeholder that mattered – the ‘shareholder’- had not taken root, with all the disastrous consequences that have followed.
I tend to see the challenge as dealing with the huge ‘deformities’ that have developed in capitalism over the last 30 or so years – trying move to something like the balance of state and private that had been relatively successful post-war. Sadly I don’t see a credible alternative being put forward by any of the politicians at the moment, though debates on this blog get closer than most.
Travel through the backwoods of Romania last autumn reminded me why a simplistic pure Marxist alternative is if anything even worse.
Let me agree with that last sentiment: there isn’t a Marxist alternative
Why mention Marxism? Raising an inverse Godwin’s Law. There are economists influenced by Marx like Richard Wolff who have plenty of alternative ideas. As for Romania -capitalism has sailed in creating cultural devastation/vast unemployment/absurd commodity prices and the respect of environmental destruction via fracking companies bypassing democracy.
Romania has been a victim of the usual firesale of public assets and rentier capitalism that has created cultural devastation and mass emigration -things needed to change but not via financialisation and monetisation of everything.
No-on actually reads Marx – go and read it and see how many times the word ‘state’ is mentioned-barely at all.
We should all know by now that ‘maximising shareholder value’ is no way to provide long terms stability for social structures-yet this model continues. new metrics are needed to focus an a greater level of well-being and social equity – but implying that a state-monolith is the only alternative is disingenuous and creates a false polarity.
You are correct saying Marx did not trouble himself with “States” when he realised the main opposition was Capitalism.
For anyone who may be interested the following link is to an excellent article on how prescient Karl Marx actually was.
http://www.sott.net/article/297254-Karl-Marx-was-right-capitalism-seeds-its-own-destruction
I’m not sure Marx would have aspired to having present day Romania or anywhere else in the Soviet Union being described as “pure Marxism”.
It’s a bit like calling what’s left of Detroit or Flint Michigan (or some other godforsaken polluted backwater of industrial capitalism) as “pure Smithism”.
They are however both good examples of the failure of the state and private spheres to work together and provide a sustainable future for its citizens. Both countries display the same underlying problem that its citizens do not share remotely equally in the means of production and financial surplus.
We should get away from labels and talk about things that people can understand and not debate the philosophical and academic minutiae and pedantry.
For example, how much inequality is good for society, how much wealth should one person own, what should the state provide, what should for profit business be allowed to trade in, who should look after those who fall ill or slip through the safety net of being able to look after themselves, etc etc etc…
I’ve lost faith in all political, economic and philosophical ideology, just like I lost faith in religion many years ago (fortunately before it got its teeth into me).
The good things is that we are all human beings and we can sort this out creatively with our own imaginations, without having to rely entirely on anyone else’s little (or big) books. There are however a few obstacles still to overcome!
I think I’d agree with that – to be a touch facetious, ideologies of whatever flavour tend to be for those of limited imaginations who want a simple set of rules to cling to. None of them work in the messy changing world in which we all try to live, and make a living. Horses for courses for different countries at different times and stages in their development. Being able to deal with apparently contradictory ideas and agendas – state vs private, future vs present, old vs young, local vs national vs international et al. And dare I say it, capital vs labour
That means a degree of ambivalence and uncertainty and thats a hard proposition to define, let alone to sell. I don’t doubt that with some creativity and imagination, an evolution from where we are now – which will need to keep evolving – is both possible and essential.
Richard is doing his best to move the process along, and the rest of us need to give it our best too. But the current level of debate at a political level seems to be a long way from where it needs to be, and its hard to see where one can constructively engage
The argument in statistics 101 is that CPI doesn’t include house prices because it is a pan European measure and no one could agree how to measure housing costs across all the economies given differences in the structure of the housing market, so they just left them out.
I’m pretty sceptical about most economic indicators generally and how they are put together eg. GDP, wage statistics etc. But I’m also a fan of having accurate and nuanced data across the economy.
I’m pretty sceptical about CPIH. For instance, it is all very well having a general measure of housing costs, but there are important things in there that determine affordability of housing. Eg. Regional variations for renters, variations in affordability across size of house (particularly affecting families). Plus, household affordability isn’t directly related to house prices. Eg. if house prices fall, but interest rates go up, then, houses might get less affordable.
So one question would be can CPIH genuinely measure housing costs across the economy, which feeds into your question about using it for policy
If you have a complex economy with a dozen different features/sectors/aspects then you need a dozen set of measures. When you then see the figures they come up with you then have to work out what is going on or not going on. Stacking the pile on only a single or a couple statistical supports is always going to go wrong and if you fail to deal with it then the markets or the sheer complexity will make sure you pay for it.
That was at the heart of the concept of the balanced scorecard – a dashboard of indicators that provided those “steering the ship” with essential high level information on how they were doing for all their stakeholders. Any warning lights would then prompt further investigation and corrective action where required.
The problem was it didn’t come with a “moral compass” to make sure the ship was heading in the right direction!
I think it was Edward Heath who described trying to manage the economy just with the interest rate was like ‘one club golfing’. Much the same with indicators.
Id stick with the core point that defining a measure of inflation that ignores housing costs is going to be of limited value and sometimes outright misleading. if the alternatives are complex, so be it
I have long advocated including HPI in general inflation indices because it has come over to me that rents/mortgages do have a gravitational pull on the prices of other commodities.
However, that was when I lived in London for 6 years in the mid to late 90’s.
Where I live now (in the Midlands) I would say that the link between rents/house prices and other prices is not so pronounced or even easy to discern as an overall phenomenon.
So I do see Richard’s point.
House prices in the West Midlands were predicted to rise by 4.4% this year. The whole thing is an economic and social disaster for most of the country and will take years to reign in even with the introduction of LVT.
Whatever the FT says, CPIH doesn’t include house prices or mortgages. It is CPI with the addition of “owner-occupied housing” costs, but the latter is represented using the “rental equivalence” method – i.e. how much would it cost to rent the same property?
See http://www.ons.gov.uk/economy/inflationandpriceindices/articles/consumerpriceinflationdetailedbriefingnote/december2015
For inflation-targeting, perhaps an index including house prices would be too volatile; and house prices are subject to different influences from other prices. However, house price rises in excess of wage rises do affect the cost of living, as much as other price rises do. We could do with an inflation index that recognizes that, even if it were not used for targeting.
The best decade for British housing was the 1930s. No national planning framework, no green belt, no national parks, and record numbers of lavish semis went up to create the most desirable tree-lined suburbs of today. Affordability was solved, but the decade ended with a Britain so desirable that Europe’s biggest military power wanted to invade.
You might say there is no connection to the war that followed, but I’d rather not take my chances on a planning free for all, however beneficial, thanks.