Research from the National Institute for Economic and Social Research argued that the measures by the National Statistics Office to increase prices annually were 0.4 percentage points too low in May because they paid too much weight to goods and services that were not available due to Covid-19, pulling the inflation rate down.
The ONS reported that the Bank of England’s CPI inflation target measure fell to 0.5% in May and a broader measure, including owners’ housing costs, was 0 , 7%, but these figures were underestimated according to Professor Huw Dixon of the University of Cardiff.
“Many people think that there is a little more inflation at the moment and I think they are right,” he said, explaining that the small measure of price increases on the NSO was due of the statistical authority “to have to stick to international measurement” protocols “.
These, he said, do not reflect the reality of price changes during the pandemic. The particular problem, he said, was that the NSO could not measure the prices of 16% of the normal basket because certain items such as haircuts and restaurant meals did not exist at the moment. while others, such as gasoline, were largely purchased. quantities below normal.
Instead of changing the basket of goods to reflect what people were actually spending, the ONS had set prices for missing goods and services so as not to change the overall inflation rate.
Using estimates of changes in spending, including the fact that households were spending more on food than usual, the price of which rose, Professor Dixon calculated that the real inflation rate was 0.4 percentage point higher than that recorded by the ONS.
His methods were supported by a similar study on American prices by Harvard Business School associate professor of economics Alberto Cavallo, who calculated that inflation in the basket of goods that American households spent had halved. as much as the rate recorded in the United States. during the crisis.
In Great Britain, a particular problem has been the heavy weight of official figures given for clothing and footwear, where prices fell 3.1% in the year ending May, but spending on these items had dropped sharply during the lockout.
This very negative price movement has therefore received far too much weight in the overall measure, said Professor Dixon.
Latest Coronavirus News
Follow FT coverage and live analysis of the global pandemic and the rapidly evolving economic crisis here.
The Institute for Fiscal Studies also found that the rate of food inflation observed by households was higher in the first month of foreclosure than usual in a year.
The price hike, said the IFS, is due to the absence of the usual two-for-one style offerings in supermarkets, which it was able to detect in an analysis of millions of individual transactions. Data from the ONS, on the other hand, does not capture the evolution of the offers that households can benefit from.
This measurement problem is separate from long-standing concerns about the official retail price index, which the ONS recognizes is too high, and the Treasury is currently consulting on improvements to its methodology.
Professor Dixon said there is still no reason to believe that the ONS inflation measure will remain too low after coronavirus, but the agency would be well advised to update the basket. goods it uses to measure inflation to reflect items that are currently being purchased.