A high-profile mistake in the UK’s inflation data is prompting scrutiny of other weaknesses in the way the indicator is compiled, as the Office for National Statistics battles to restore faith in the quality of its output.
The ONS admitted this month to an “error” in its regular consumer prices index report, which wrongly added 0.1 percentage points on to the headline rate of inflation.
However the mistake — which the ONS blamed on faulty data from the Department for Transport — comes as other aspects of its methodology come under greater focus, from hotel costs and live music tickets to the price of video games.
Some analysts argue the ONS should widen the array of data it collects, while others criticise delays in the introduction of supermarket scanner data meant to make grocery prices more accurate.
The issues add to a steady drip of wider problems in UK official statistics that is leading to a reduction of faith in the overall quality of the country’s economic data. CPI inflation, as the basis for the Bank of England’s primary mandated target, is one of the ONS’s most prominent and closely watched data series.
“When I’m talking to hedge funds around the world, all they’re hearing is issue after issue after issue,” said Sanjay Raja, an economist at Deutsche Bank. “The more you hear, the more noise you have, the more you start to discredit a national statistics body like the ONS.”
The May CPI reading is due on Wednesday, a day ahead of the next Bank rate-setting announcement. Analysts stressed concerns about the CPI do not approach the level of worry surrounding the UK’s labour market statistics, which are stricken by declining survey response rates.
But the problem in the April CPI reading was a blow nevertheless. The figure should have triggered alarm bells within the ONS ahead of release, said Andrew Goodwin at Oxford Economics: “It failed the sniff test.”
Scepticism about CPI has driven some economists to produce their own version of the index, with certain volatile elements stripped out, or to put greater weight on other sources of pricing data.
Sonali Punhani, an economist at Bank of America, said her firm is focused on its own measure of services prices — stripping out airfares, package holidays and accommodation costs — as it attempts to produce a clearer reading.
“I think everyone is looking at alternative or comprehensive indicators,” she said.
The ONS uses a variety of techniques to track prices, which have come under close scrutiny after the pandemic and war in Ukraine pushed inflation to multi-decade highs.
The bulk of price-gathering is carried out by ONS-employed agents, who visit shops, call companies or trawl the web to observe prices for the most popular items. But many of these items have idiosyncrasies that can produce volatile results.
For instance, the ONS measures the price of console games, but does so by having each agent track the price of a single bestselling game at the retailers they monitor. As a result, movement in the bestsellers list and agents’ own decisions can produce large shifts.
Rob Wood, at consultancy Pantheon Macroeconomics, warned that within the inflation “basket” there were some “pretty volatile components where they have a low sample size,” pointing to video games and hotel stays.
Pop star Pink’s appearance in Cardiff last June coincided with a spike in prices at one hotel in the Welsh capital. The ONS only observed prices at four Welsh hotels that month, meaning figures for the country as a whole were severely skewed, which then affected the UK-wide index.
“No one could hand-on-heart call it a Wales hotel price when you have such small [sample] numbers,” one economist told the FT. It should, they added, be possible to sample a much larger range of hotel prices online.
Package holidays are another area of concern, with economists citing a lack of clarity around the standard of trip agents are observing.
There are also worries around how the ONS handles “dynamic pricing” — where businesses offer varied prices in response to demand. The practice is under closely scrutiny ahead of a series of gigs by Britpop band Oasis this summer, but an ONS spokesperson told the FT it excludes “big-name” bands with “highly distinctive and unique abilities to charge diverse prices”.
Ruth Gregory of Capital Economics said her own analysis suggested the CPI is overall not high on the worry list when it comes to UK data accuracy, pointing instead to labour market and trade figures.
Other statistical offices around the world face similar problems, both when it comes to lower response rates of surveys or responding to increasingly dynamic pricing strategies in online goods and services.
But Raja said the ongoing concerns were damaging nevertheless. “My fear is that you tend to look asymmetrically at the UK data and start to discount it,” he said.
The ONS said the office meets regularly with users of its prices statistics to ensure their needs are met.
“This includes our ongoing work to improve and develop our inflation figures, updating the way we collect and process price information to reflect our changing economy to produce ever more detailed inflation statistics,” they said.
“The ONS produces our consumer price statistics using transparent methodology and in line with international best practice. These are high quality and trusted statistics, that are accredited by the UK’s independent statistics regulator.”
