MNI INTERVIEW: New UK Household Costs Data Fall Short - Weale

The UK’s new Household Costs Indices, which are meant to express the varying experience of inflation for different income groups and categories, have fallen short by failing to capture key costs such as taxation and by using an over-simplified model of income when weighting expenditure, a senior economist advising the Office for National Statistics told MNI.

Unlike the headline CPI measure targeted by the Bank of England, which reflects total expenditure in the economy and effectively gives more weight to higher-spending groups, the HCI are “democratic” price measures, providing differentiated measurements for various income groups and for categories such as owner occupiers and renters, and retired and non-retired households. The new indices, which also include mortgage costs and make allowance for the widespread use of deferred payments, have consistently run above the CPI over the past couple of years, with a peak gap of 2.1 percentage points in March 2023, dipping to 1.5% in the latest release.

But Martin Weale, chair of the National Statistician's advisory committee on Standards for Economic Statistics, said the HCIs remain a flawed measure. Significant costs such as taxation are excluded and while expenditures are calculated democratically by the Office for National Statistics, the measure of household income used for weighting is not.

“The ONS could go quite a long way,” Weale said in an interview. “If they were to publish the geometric mean of household income deflated by a democratic price index what comes out is the average of each household's growth experience … I do think they're missing a trick.”

TAX FREE

The expenditure basket is also incomplete, he noted.

"If you want to look at the changes in the cost of living then what goes into the cost of living? The HCI assumes that mortgage payments do but tax payments don't. Why you should include one and not the other, though, still isn't clear to me," Weale said.

However the former two-term member of the BOE’s Monetary Policy Committee said it would be inappropriate to use the HCI or any measure including mortgage costs as the inflation target.

"If you put up the interest rate and ... the target measure went up, life would be even more difficult for the Monetary Policy Committee. They are they are quite unsuitable for inflation targeting because of the perverse interest rate effects," he said.

According to the HCI, between April 2022 and June 2023, inflation for low-income households was around two percentage points above that for those on high incomes, with energy costs a key differential.

Like the ONS, the Bank has also invested heavily in so-called heterogeneous agent models, which aim to capture the varying propensity to consume of different parts of the population, but the BOE’s models are still likely to rely on the standard CPI as a deflator, Weale noted.