ONS decides to continue with inaccurate RPI calculation

Statistics agency chooses consistency over accuracy.

Against expectations and the recommendations of a number of influential economists, as well as its own consumer prices advisory committee, the ONS has decided not to change how the RPI – one of the two key indices measuring the rate of price inflation – is calculated.

The pressure to examine the index comes from the longstanding difference between the RPI and CPI measures of inflation. Except for the brief period in the midst of the recession, when both indices were recording deflation, RPI has consistently shown levels of inflation higher than CPI. Here's the chart for the last three years, for instance:

 

Some of that difference is due to the fact that the two indices measure subtly different things – RPI includes a broader measure of housing costs, for instance, and it ignores very high and low income households. But the ONS has known for a while that there is also a discrepancy caused by the different formulae used to calculate them.

The ONS began a consultation into whether and how it should eliminate this "formula effect", and has concluded that:

Use of the arithmetic formulation (known as the ‘Carli’ index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI… This formulation does not meet current international standards.

So what's it going to do about it? Well, nothing:

The National Statistician also noted that there is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.

Therefore, while the arithmetic formulation would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged.

The ONS will, however, develop a new measure of inflation, called RPIJ, which will use a different, better, mathematical formula.

The consumer prices advisory committee, a body which meets around five times a year to advise the ONS on measures of inflation, accepted that the ONS has a responsibility to make sure that there is a level of continuity in the RPI calculations which would be destroyed if there were a change to the formula. But, given the ONS also has a responsibility to compile those statistics "in line with best practice", CPAC concluded that not changing RPI would be "unsuitable".

On the other side, arguing for no change, were 332 of the 406 replies to the public consultation. The ONS said:

The large majority of responses did not address methodological issues but identified the impact that the changes implied… would have for them.

The competing requirements present a tricky path for the ONS to follow, but it does feel like it has picked the wrong option at this point. The job of the statistics agency is surely to produce accurate statistics, rather than statistics which are continually inaccurate in known ways. The fact that RPI is used to decide the value of, amongst other things, index-linked bonds is a reason for it to be correct, not for it to be artificially inflated.

As it stands, the ONS has decided to continue publishing a "measure" of inflation which has an accepted and understood upward bias of 1 per cent a year. It has done this, not because of any real statistical reasoning, but because greater accuracy would be bad for a majority of stakeholders. That seems like a bizarre abdication of its duty.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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