Consumer price inflation, updating weights: 2017

Consumer price inflation is an important indicator of how the UK economy is performing. The “shopping basket” of items and their economic importance (or weight) used in compiling the various measures of consumer price inflation¹ are reviewed and updated each year to ensure the indices remain representative of the latest consumer spending patterns.

This article focuses on updates to the weights applied within these baskets. The second section explains what is meant by a weight and why weights are required. The third section will explain how weights are calculated in consumer price inflation, defining the data sources and methodology used. The fourth section will take a specific look at recent improvements in the weighting of CPIH – consumer price inflation that includes owner occupiers’ housing costs (OOH). The fifth section will look at the aggregation structure, that is, what level are weights calculated at and where are they used to aggregate through price indices. Finally, the sixth section will take a look at the latest (2017) set of consumer price inflation weights and explain any notable movements when comparing with 2016.

This article will primarily focus on the CPIH. Further detail on the methods and process discussed in this article can be found via the CPIH compendium and the Consumer Price Indices technical manual.

Notes for Introduction

1. Namely CPIH, a measure of UK consumer price inflation that include owner occupiers’ housing costs, the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

Consumer price inflation is the speed at which the prices of goods and services bought by households rise or fall and is estimated by using price indices. One way to understand a price index is to think of a very large shopping basket containing goods and services typically bought by households. The price index estimates changes to the total cost of this basket by calculating the average of price changes of the items within the basket.¹

However, we know that households spend more on some goods and services than others, so we would expect, for example, a 10% increase in the price of petrol to have a much bigger impact on the basket than a similar rise in the price of tea. For this reason, the components of price indices are weighted; using the amount we spend on these items as consumers, to ensure that it reflects the relative importance of the various items in the average shopping basket.

The various weights used in the calculation of consumer price inflation, along with the items that form the “shopping basket” are reviewed and updated each year. This ensures weights remain representative of current household expenditure patterns and reflect the introduction of new items into the shopping basket and removal of old ones. A separate article is published that explains the annual update to the content of the consumer price inflation basket of goods and services.

Notes for What is a weight?

1. In reality there are 3 inflation baskets: for the CPIH, CPI and a basket used by RPI.

Within CPIH and the Consumer Prices Index (CPI), there are 4 different types of weight:

• central or regional shop weights
• stratum weights
• CPIH and CPI item weights
• Classification Of Individual Consumption according to Purpose (COICOP) weights, for the CPIH and CPI higher level indices

This list is the order in which the weights are used. The first 2 types of weights are used to produce the item indices (that is, combining the individual items within the basket), the next is used to combine items into higher level indices (that is, COICOP level indices) and the last is used for all levels above this. Aggregation is explained further in section 4 or via the technical manual. This article will now focus on the COICOP level weights.

In 2017, a new, additional level of the COICOP classification has been introduced. This new level of detail, known as COICOP5 will sit between the existing class (or COICOP4) level indices and item level indices. Further detail on the impact of introducing this new level of classification can be found in the October 2016 article explaining methodological improvements on the consumer price indices.

3.1 Data sources for CPIH and CPI weights

In consumer price inflation, expenditure weights are designed to reflect the expenditure patterns of the target population of households covered by the index. CPIH and CPI have a different target population to the Retail Prices Index (RPI)¹ and therefore have different expenditure weights, and thus a different source of data underpinning the weight.

The CPIH and CPI cover all expenditure within the UK by:

• private households
• residents of institutions such as university halls of residence or nursing homes
• visitors to the UK from abroad

Information on spending patterns, which underpin the CPIH and CPI weights, largely come from the household final consumption expenditure (HHFCE)² component of the UK National Accounts. These data are used because the expenditure information is comprehensive and balanced against data collected in other sectors of the economy to create the most accurate picture of consumer spending. However, there are a few exceptions where additional source data are used to supplement the HHFCE data and improve the coherence with the intended scope of the indices.

• the Living Costs and Food Survey (LCF) is used to supplement HHFCE data in the calculation of weights for air travel, package holidays and actual rentals
• the International Passenger Survey, which is also used in the calculation of a weight for air travel
• the public sector component of the national accounts, which is used in the calculation of the weight for passport fees

The HHFCE expenditure used in the annual update of CPIH and CPI weights is always the latest available calendar year national accounts dataset that is available at the time of weights calculation, that are consistent in methodology with the latest published Blue Book. The annual CPIH and CPI weights update takes place in January each year, so the weights are sourced from the latest national accounts update in Quarter 3 (July to Sept) of the preceding year. For example, for the 2017 weights update, the latest set of HHFCE expenditure was taken from the Quarter 3 2016 National Accounts dataset. This data is consistent with the most recent Blue Book release (Blue Book 2016, published in Quarter 2 (Apr to June) of 2016). In all cases the current price measure (as opposed to the chained volume measure) is used. Effectively, the 2017 weights are calculated using a more up-to-date version of data in Table 6.4 of Blue Book 2016: Individual consumption expenditure at current market prices by households, non-profit institutions serving households and general government: classified by function.

This approach to the use of the latest national accounts data is consistent over time and will remain so into the future.

3.2 Methodology behind the update of COICOP weights and above

Higher level CPIH and CPI weights (that is, at the COICOP level and above) are updated annually with the January index (published in February), followed by a further update with the February index (published in March) due to the introduction of improved methodology (the “double link”) for the production of consumer price inflation and to coincide with the introduction of new items to the basket of goods and services. The underlying expenditure in each COICOP grouping is converted to an expenditure share relative to total household expenditure for the overall basket and given an integer weight in parts per thousand so that the sum of the weights equals 1,000.

The weights are based on the latest available calendar year’s HHFCE data; however, this data is not timely enough for immediate use in consumer price indices due to the lag at which national accounts data is published. For example, in Blue Book 2016 the latest available calendar year is 2015. To make the expenditure data as up-to-date as possible, we can restate the expenditure in current prices using a process called price updating.

To explain further, for a given index year y, the weights are based on the latest available national accounts expenditure from y minus 2.

At the first annual update of weights (published with the January index), the expenditure needs to be price updated to December of year y minus 1. For the 2017 weights this would mean expenditure from the calendar year 2015 is updated to December 2016 by applying the respective change in price between 2015 and December 2016. This process is applied at the lowest level of COICOP within the weighting structure using the accompanying price movement for that COICOP level in CPIH and CPI (this process is presented in formula in Annex E of the CPIH compendium).

At the second update of weights, published with the February index, the same underlying 2015 expenditure is updated to January of year y. So for the 2017 weights this would mean expenditure from the calendar year 2015 is updated to January 2017 by applying the respective change in price between 2015 and January 2017. This approach ensures the latest available expenditure is adjusted so that it is suitable for use in the calculation of consumer price inflation weights.

Further details on this double update approach can be found in the October 2016 methodology article and Annex E of the CPIH compendium.

There are 2 further aspects of the annual weights update that warrant a mention.

Firstly, when calculating the CPIH and CPI weights for insurance (such as insurance connected with the dwelling, travel, health and transport) an average of the most recent 3 years data is used in line with international regulation. As insurance expenditure is recorded on a net basis (the difference between expenditure on insurance premiums and the amount paid out in claims) this approach safeguards against exceptional cases where the amount paid out in claims could exceed the amount paid in premiums.

Secondly, the revisions policy for consumer price statistics means that indices are not usually revised historically. Published weights for consumer price inflation reflect the best available understanding of what households spend their money on in the UK at the time they were produced. Whilst the source data are often revised at a later date, these revisions are not taken into the calculation of weights, that is, only the latest calendar year’s data are used in each weights update. As such, the changes in weights between years may reflect changes in data sources, methods and definitions, as well as changes in spending patterns. For this reason, the weights should not be used to analyse trends in consumer spending over time.

Notes for How do we calculate weights in consumer price indices?

1. Further details on the RPI can be found in section 10 of the consumer price indices technical manual.
2. Consumer trends, Quarter 3 (July to Sept) 2016.

The revisions policy outlined in section 3.2 means that consumer price statistics are not usually revised historically. In recent years, revisions to expenditure used in the calculation of CPIH weights and in particular the owner occupier housing component (OOH), have been taken on as exceptional cases. These revisions occurred in 2015 and more latterly in the 2017 weights update and will be explained in more detail in this section.

The production of national accounts estimates is typically open to revision as new methods and improved data sources become available. In 2015, it was announced that substantial improvements were being made to the measurement of imputed rentals for housing in the national accounts that were scheduled to be published in Blue Book 2016. Imputed rentals¹ is the method used to measure the weight of the OOH component of CPIH. Given the likely size of the revisions in national accounts and the potential of introducing a large step change in the OOH weight we took the opportunity to revise the OOH expenditure alongside methodological improvements that were also being introduced to the processing of private rents data in CPIH in February 2015. Only the OOH-related expenditure was revised in CPIH and no revisions were made to CPI expenditure.

The main purpose of this approach was to mitigate as far as possible a future step change in OOH weights and to get the full set of OOH weights in CPIH on a consistent expenditure basis back to 2005. To do this, in early 2015 national accounts estimated expenditure for imputed rentals that was consistent with the methods being implemented in Blue Book 2016. These estimates were calculated in an offline system and were for use in the 2015 revision of the OOH weight only and as such were not published. Full details of the revision and impact on CPIH were published in the February 2015 article.

As it turned out, when national accounts published 2016 Blue Book, the estimates of imputed rentals, as calculated in the national accounts system were lower than the offline estimates provided in 2015. This resulted in a notable fall in the 2016 OOH weight. However, it had been announced that CPIH was to be revised in 2017 to introduce Council Tax. This again presented a further opportunity to update the OOH expenditure so that the series would be on a consistent basis back to 2005 (using the latest published imputed rentals data from Blue Book 2016). An article assessing the impact of revising OOH weights, along with the introduction of Council Tax was published in December 2016.

The publication of 2017 weights for CPIH now sees the OOH component on a consistent basis and Council Tax included. Aside from some small refinements planned for Blue Book 2017 there are no further substantial methodological changes planned for imputed rentals and aside from the changes discussed above, large revisions are not commonplace. We do not expect to revise expenditure weights for CPIH or CPI in the foreseeable future. For more information on the calculation of OOH weights, please see section 2.4 of the CPIH compendium.

Notes for The revision of CPIH weights

1. Specifically we use COICOP 04.2, Imputed rentals for housing (identifier ADFU) from Table 6.4 of Blue Book 2016.

Having defined how and why weights are calculated in consumer price indices, it is worth defining the various levels of aggregation that weights are used in the production process.

The CPIH and CPI are classified according to the Classification Of Individual COnsumption by Purpose, commonly referred to as COICOP. This is the international classification of household expenditure and is used in the production of national accounts, Living Costs and Food (LCF) Survey and consumer price indices. COICOP enables the consistent classification of individual consumption expenditure incurred by households, non-profit institutions serving households and general government according to their purpose.

In previous years (prior to 2017) there were 4 COICOP levels, with the fourth COICOP level being commonly referred to as “class level” within consumer prices. Items within these levels are aggregated together using expenditure weights up to the first COICOP level – the headline CPIH or CPI.

Figure 1: Consumer price inflation aggregation structure

Prior to the introduction of COCIOP5

Source: Office for National Statistics

Download this image Figure 1: Consumer price inflation aggregation structure

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Traditionally the class level was the first building block of aggregation, however, as of March 2017 a new, more detailed level has been introduced into CPIH and CPI aggregation. This new level is referred to as COICOP5 and it will sit between the existing COICOP 4 level indices and item level indices. Effectively the COICOP5 classification will replace COICOP4 as the first building block of aggregation in consumer price indices and is the level at which HHFCE expenditure is delivered and COICOP-based weights in consumer price indices are first calculated. Further details on the introduction and impact of COICOP5 can be found in the October 2016 article.

Figure 2: The introduction of COICOP5

Source: Office for National Statistics

Download this image Figure 2: The introduction of COICOP5

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This section considers the largest weight changes between 2016 and 2017, focusing on the revised CPIH weights and explains the reasons for these changes. These published weights reflect the best available understanding of what households spent their money on at the time the weights were produced. Differences in the weights between years can reflect changes in data sources, methods and definitions, as well as changes in consumer spending in the UK over time. Therefore these weights should not be used to compare consumer spending over time.

This section will firstly take a look at the CPIH divisional level weights (COICOP2 level) and drill down through the structure to explain any movements when compared to revised 2016 weights. Additionally, any notable lower level movements are also explained. The tables in Annex A present the latest (February 2017 updated) CPIH weights (Table W3) and CPI weights (Table W1) from 2005 onwards. The CPIH weights in Table W3 have been revised back to 2005 to incorporate Council Tax and revised imputed rentals expenditure. The latest RPI weights (Table W2) are also included for reference.

6.1 Summary of weight changes

The update of 2017 weights has seen the introduction of 2 methodological improvements as explained in section 3:

• the introduction of a new COICOP level, known as COICOP5
• the introduction of a double chain-link methodology

Both of these improvements are common to CPIH and CPI. In addition to this, for CPIH only, Council Tax has been introduced into the basket of goods and services, whilst the weight of the OOH component of CPIH has been revised back to 2005 to reflect the expenditure published in the 2016 Blue Book. Whilst the CPIH tables in Annex A have been updated to reflect the revised weights, the weights prior to revision can be accessed via Annex A of the 2016 weights article.

To reflect these improvements, the analysis in this section presents the revised 2016 weight, along with the January 2017 update of weights and the February 2017 update of weights, followed by an explanation of any notable movements when comparing with 2016.

Table 1 presents the CPIH divisional level COICOP weights. The most notable movements will be explained further in this section, firstly focusing on the comparison of January 2017 updated weights to the revised 2016 weight and then explaining any change between the January 2017 and February 2017 update. Typically, changes in weight between years can be caused by 2 factors:

• a change in the underlying expenditure used to calculate the weight
• a change in the price factor applied to price update the expenditure

This year, however, the change between years has been complicated by the introduction of improvements mentioned previously and the revision of OOH weight. The change when comparing the February 2017 update against the January 2017 update will be driven by any notable movement in price factor, which is used to price update the underlying expenditure.

Division 01 Food and non-alcoholic beverages

This division has a weight of 83 parts per thousand (ppt) in the revised 2016 CPIH weights, which has fallen to 81ppt in the January 2017 update of weights. There are 11 classes making up the division, ranging from bread and cereals through to coffee, tea and cocoa. No one class is driving the fall in weight. In general, the underlying household expenditure used to calculate the weights is relatively flat between years. The January 2017 weights for three classes; meat, milk and vegetables have all seen a small fall of 1ppt between 2016 and 2017, offset by a small increase of 1ppt in the coffee, tea and cocoa class.

The weight for this division remains the same at the February 2017 update.

Division 02 Alcoholic beverages and tobacco

This division has a weight of 34ppt in revised 2016 weights, which has now fallen to 33ppt in the January 2017 update of weights. This fall is driven by one class – tobacco, which has seen a fall in weight from 19ppt to 18ppt. Whilst the underlying expenditure on tobacco has fallen slightly, this is further exacerbated by a fall in the price updating ratio of approximately 1% between what was used in 2016 and 2017 (note this doesn’t mean the price of tobacco was falling, just that the price didn’t increase as much between 2016 and 2017).

The weight for this division then increases by 1ppt, to 34ppt at the February 2017 update. This increase is driven by the spirits class, which saw an increase in price of almost 7% between the update of weights. This price increase pushed up the underlying expenditure causing the weight to increase from 4ppt in the January update to 5ppt in February 2017.

Division 03 Clothing and footwear

This division has a weight of 58ppt in revised 2016 CPIH weights, which has increased to 60ppt in the January 2017 update. There are 6 classes that make up this division, with a new class being introduced in 2017 as part of the COICOP 5 improvement to cover clothing materials. However, the increase in weight seen between 2016 and January 2017 is driven by the garments class, which saw an increase in weight from 44ppt to 45ppt. This increase for garments came from an increase in the underlying expenditure of approximately 4% along with an increase of around 1% in the price updating factor.

The weight for the clothing and footwear division then falls from 60ppt in the January update to 58ppt in the February 2017 update. This movement is again driven by the garments class, which falls from a weight of 45ppt in the January update to 44ppt in the February update. This is caused by a fall in the price update factor of approximately 5% between the January and February 2017 updates.

Division 04 Housing, water, electricity, gas and other fuels

Further detail on the revisions to weights caused by the revision of imputed rentals and introduction of Council Tax can be found in section 4 of this article or the December 2016 article assessing the impact of revising OOH weights. Beyond this, the change in divisional weight is relatively flat between 2016 and 2017.

Table 2 presents the old published OOH weight (as published in 2016 before revision), and the revised 2017 update (including Council Tax and revised imputed rentals expenditure).

Whilst looking at division 04, it is also worth considering the classes for electricity and gas. These two classes can tend to see their weights fluctuate between years. However, in this latest update the weights for both classes have remained relatively stable. The February 2017 updated weight for electricity is 13ppt, down from 14ppt in revised 2016 CPIH weights, whilst the accompanying weight for gas is 12ppt, the same as revised 2016 CPIH weights.

Division 07 Transport

This division has a weight of 122ppt in revised 2016 CPIH weights, which has increased to 127ppt in the January 2017 update. The most notable increase is found in the second-hand cars class. This class has seen an increase of 1ppt between 2016 revised weights (13ppt) and the January 2017 update weights (14ppt). This increase in second-hand cars is driven by an increase in expenditure of approximately 13% between these periods.

The weight for this division then falls from 127ppt in the January 2017 update to 126ppt in the February update. There is a downward contribution of 2ppt coming from the class for passenger transport by air. This class had a weight of 6ppt at the January 2017 update, however, a substantial fall in price of approximately 36% between the January and February 2017 update has reduced the underlying expenditure in this class culminating in a 2ppt reduction in February 2017 to stand at 4ppt.

Division 08 Communication

This division has seen a notable fall in weight from 25ppt in the revised 2016 CPIH weights, to 21ppt in the January 2017 update. This fall in weight has been driven by the improvements from introducing a more detailed level of the COICOP classification. In previous years, prior to the COICOP5 introduction, an estimate for the bundled communications component of the telephone and telefax services class had to be derived. This was estimated using data from the Living Cost and Food survey. However, the new COICOP5 level of classification now includes a separate component for bundled communications, meaning that the data no longer needs to be estimated. The previous estimate of bundled telecommunications was higher than the now systemised estimate available following the introduction of COICOP5, so this decrease in expenditure is driving a fall in weight for the class of 4ppt.

There is no further change in the weight for this division (or classes) between the January 2017 and February 2017 weight update.

Division 10 Education

This division has seen a fall in weight from 20ppt in revised CPIH 2016 weights to 17ppt in the January 2017 update. The introduction of COICOP5 has again had an impact here, where under the old version of COICOP this division only included 1 class for education, under the new COICOP5 classification it has been split into 5 separate classes, such as pre-primary and primary education, secondary education and tertiary education. This is also coupled with a fall in the level of household final consumption expenditure (HHFCE) expenditure used in the calculation of education weights from £19.6 billion used in 2016 (for calendar year 2014, consistent with Blue Book 2015) compared to £18.3 billion in the 2017 update (for calendar year 2015, consistent with Blue Book 2016). The HHFCE 2014 expenditure for education has been revised down to £17.8 billion in Blue Book 2016; this revised data is not used.

However, there is no further change in the weight for this division (or classes) between the January 2017 and February 2017 weight update.

6.2 Other notable class movements

This final section draws out some notable COICOP class level movements in weight, which have not already been covered in section 6, again focusing on CPIH.

Class 90600, package holidays

This class has a weight of 29ppt in revised CPIH 2016 weights, which has fallen to 28ppt in the January 2017 update. This fall has been driven by a fall of approximately 2% in the price updating ratio applied between 2016 and 2017 weighting. Before this price update is applied, the underlying expenditure is essentially flat. This class weight remains the same at 28ppt in the February 2017 update.

Class 110101, restaurants, cafes and the like

This class has seen a fall in weight from 74ppt in the revised CPIH 2016 weights to 70ppt in the January 2017 update. This fall is driven by almost a 4% fall in the underlying HHFCE expenditure used in the weights calculation. The level of 2015 expenditure (used in the 2017 update of weights) for catering services in Blue Book 2016 is approximately £84billion, which is a fall from the level of 2014 expenditure published in Blue Book 2015 (and used in the 2016 weights update) of £87.3billion. However, the 2014 level of HHFCE expenditure has been revised down in the Blue Book 2016 to £82.2billion, but in accordance with the consumer price indices revision policy, these revisions to expenditure are not taken on (unless there are exceptional circumstances).

Class 110200 accommodation services

This class has seen a weight increase from 17ppt in revised CPIH 2016 weights to 24ppt in the January 2017 update. The reason for the change in weight is similar to that for restaurants, cafes and the like in that it is driven by revisions to HHFCE data. The level of 2015 expenditure for accommodation services in Blue Book 2016 is approximately £26billion, which is almost a 40% increase from the level of 2014 expenditure published in Blue Book 2015 (and used in the 2016 weights update) of £18.6billion. However, the 2014 level of HHFCE expenditure has been revised upwards in the Blue Book 2016 to £23.6billion, but in accordance with the consumer price indices revision policy, these revisions to expenditure are not taken on (unless there are exceptional circumstances).

Further information about the construction of the weights can be obtained by contacting:

cpi@ons.gov.uk

Telephone +44 (0)1633 456900