Inflation

Frontmatter

Chapter 1. Introduction

Abstract

We are all consumers; we buy and use a wide range of goods and services, and the prices we pay change over time. While we sometimes see prices fall, the general perception of most people is that, overall, prices tend to go up. We might question whether this is in fact true. As each of us consumes different items in different quantities and different combinations from anyone else, and we are endowed with our own tastes and resources, we each have a very individual experience of how prices change.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 2. What Is Inflation?

Abstract

This book is largely concerned with the use of a statistical tool, Index Numbers, to measure a particular economic phenomenon which is typically referred to as inflation. This chapter of the book will focus on what inflation is, why it matters and why it might be important that we have a good measure of the phenomenon in the form of an Official Statistic, and in turn, why it might be important to read the rest of this book! Economists will likely be familiar with much of the content in this chapter; however, it is worth making sure that we begin our discussion of the measurement of inflation on a common footing with those readers who may have less training in this area.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 3. The Origins of Inflation Measurement: 1700–1879

Abstract

The identification of the time period that constitutes the “early history” of inflation measurement is, of course, an arbitrary one. In this book, we have taken the period 1700–1879 as a useful division of time to cover for this early history. This chapter cdescribes the early developments which laid the foundations for the official development of inflation measurement.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 4. What Is a Price Index?

Abstract

Having seen how some of the early price indices were constructed in response to a specific need, in this chapter we discuss what a price index is and how it can be put together, using a relatively simple data set to highlight many of the issues. In order to help clarify the issues we are talking about in determining an appropriate measurement of price change, we first attempt to clarify the language that we will use to talk about measuring a change in the price level. Then we consider the potential inputs to such a process and then discuss how such inputs might be used to produce meaningful estimates of the change in the price level, some of the methods for which we have already met in Chap. 3.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 5. The Development of the Cost of Living Index: 1880 to 1946

Abstract

The need for a “standard of value” or “general level of prices” as a means of adjusting contracts and wages had been proposed by a number of commentators in the nineteenth century, as Chap. 3 described. However, it wasn’t until 1914 that this was achieved in the UK, and then, only in an imperfect form. This chapter describes the developments that took place to establish the data needed for an index of retail prices—household budget shares and the prices of goods and services.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 6. The Development of the Retail Prices Index: 1947–1989

Abstract

The period from the end of the Second World War to the close of the 1980s saw the official measure of inflation undergo very significant change. It went from a limited measure, with index households restricted to working-class families, a limited range of goods and services in the basket and utilising weights which were decades out of date, to a modern measure that we would recognise today.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 7. What’s in the Basket?

Abstract

Although the methodology behind the measurement of the general level of prices contains many technical and complex elements, there is one aspect that is easier to understand and is of particular interest to the general public—the basket of goods and services. The construction of a representative basket is a vital element of the process of measuring consumer price inflation.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 8. Collecting Prices

Abstract

All of the price indices we will discuss in this book require observations of prices at different periods of time in order to allow for construction of even the most elementary of price indices. As it is currently impossible for anyone, or any organisation, to produce a complete list of prices of items available at any given point in time (or a complete list of transaction prices), it is required that only a sample of prices is collected each period. This chapter considers how ONS goes about collecting the large number of price quotes needed in order to provide the raw material required in producing a price index such as the CPI.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 9. Estimating Household Expenditure Shares

Abstract

Previous chapters have identified the two essential sets of data that are combined to produce a consumer price index—they are the change in prices of individual goods and services between two time periods and a measure of the proportion of household expenditure on those goods and services. This chapter looks at how household expenditure studies have develped over time and how the process is carried out today.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 10. From the RPI to the CPI: 1990–2011

Abstract

This chapter continues the story of measures of inflation in the UK and covers a period of two decades which saw significant change in the use and measurement of inflation statistics. A number of these developments have had long-lasting consequences for the statistics considered in this volume. This period also includes the development of a formal inflation targeting regime in the UK, with the target specified in terms of annual changes in the Retail Prices Index. This is followed by the development of the Harmonised Index of Consumer Prices by the European Union, the UK implementation of which is the Consumer Prices Index.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 11. Measuring Inflation at a Detailed Level

Abstract

As we have seen in other chapters in this book, the construction of a price index for measuring inflation is a complex business; however, at the lowest level of most price indices, it is reduced to a more simple problem: How to measure the average price change when we are faced with only price information? In this chapter, the main methods for doing this are re-introduced and the relationships between them are considered before we discuss the various ways in which people choose between the available methods.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 12. What Should We Be Measuring?

Abstract

We have already met much of the history of Index Numbers as it has been utilised in measuring inflation, along with a review of techniques currently used in the production of inflation figures by the ONS. In this chapter, we stand back from the stream of these issues to consider what we measure when we estimate inflation and how it relates to the economic theory of what inflation is. We will firstly consider the main choice between the type of index we might ideally want to produce using the tools at our disposal, before dipping into the theoretical literature on the economic approach to inflation to see what it can tell us about constructing an index.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 13. Recent Developments: 2012–2016

Abstract

The period from the Autumn of 2012 to the Spring of 2016 saw intense scrutiny of consumer price indices with two public consultations, two UK Statistics Authority monitoring and assessment reviews, two external UK Statistics Authority Reviews and a National Statistics Quality Review of the Living Costs and Food survey, a key source of weighting information. This degree of attention paid to the indices reflected an increasing focus on engagement with users of Official Statistics and the general public.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 14. Other Price Indices

Abstract

Price indices are used to measure change in a range of different situations. This chapter covers prices charged to and by businesses, particularly the Producer Price index which has its origins in the nineteenth century and provided the initial impetus for development of price index methods. Further business indices have been introduced in recent times, and Import and Export Price Indices and Services Producer Price Indices are also described. Some other types of price indices are briefly outlined—the House Price Index, implied deflators and Purchasing Power Parity.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Chapter 15. A Look to the Future

Abstract

In this book, we have tried to describe the history and current practice involved in the use of Index Numbers for the measurement of the economic variable of inflation. Hopefully, the preceding chapters have conveyed that the process of arriving at the current state of practice and thinking has been a complicated one informed by developments in theoretical arguments, the resources available to those gathering data and advances in technology.

Robert O’Neill, Jeff Ralph, Paul A. Smith

Backmatter