1. No category

Revising the weight of Owner
Occupiers' Housing in CPIH
Rhys Lewis
1. Introduction
Recent work by the Office for National Statistics (ONS) and the Valuation Office Agency (VOA)
resulted in improvements to the rental equivalence measure of owner occupiers’ housing costs
(OOH) in CPIH1. The revision to the OOH component in CPIH has presented ONS with a one-time
opportunity to revise the OOH weight in CPIH so that it is aligned with historical National Accounts
estimates and reflects, as far as possible, planned changes to the methodology for measuring
imputed rents that will be introduced in Blue Book 2016.
The revised CPIH series, showing the impact of both improvements to the OOH series and
updating the OOH weights historically (to reflect the Blue Book 2016 changes), are presented
within this article. Completing this work, the ONS will revise the OOH component within CPIH and
the CPIH itself as part of the 2015 annual update in March 2015. Following this, the approach to
revisions in CPIH will revert to that which is usual for consumer price indices and follow the
procedures as set out in the CPIH revisions policy 2.
2. Background
2.1 Impact of OOH revisions on the UK National Accounts
Estimates of household expenditure on actual rentals and imputed rentals for owner occupiers’ are
both included in the National Accounts. Under current methodology, estimates of the volume of
these are produced first, and then inflated using an appropriate index to give a current price (value)
estimate. From 2011 onwards 3 the index used has been the CPIH index for actual and owneroccupied rentals.
The revision to the OOH index 4 will therefore directly affect the relevant household expenditure
current price estimates in the National Accounts, but not the volume estimates. Revisions to the
OOH component in CPIH will be taken on as part of the Blue Book 2015 process, with publication
1
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/improvements-to-the-measurement-of-owneroccupiers--housing-costs-and-private-housing-rental-prices/index.html
2
http://www.ons.gov.uk/ons/guide-method/user-guidance/prices/cpi-and-rpi/consumer-price-inflationrevisions-policy-october-2013.pdf
3
http://www.ons.gov.uk/ons/rel/naa1-rd/national-accounts-articles/revisions-to-household-expenditure-onrentals-to-align-with-the-consumer-price-index-with-housing/index.html
4
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/improvements-to-the-measurement-of-owneroccupiers--housing-costs-and-private-housing-rental-prices/index.html
Office for National Statistics
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due in October 2015 5. Further improvements to the methodology for actual and imputed rentals will
be introduced in Blue Book 2016 (BB16). More information on these changes will be made
available at a later date.
2.2 Impact of methodology revisions to imputed rents on OOH weight
When CPIH was launched in early 2013, weights for the OOH component were calculated using
the Blue Book 2012 estimates for expenditure on imputed rents, consistent with the standard
method for calculating weights. In Blue Book 2013, a revision to the methodology used to calculate
imputed rents in the UK National Accounts 6 resulted in a step change upward in the weights used
for OOH in CPIH, increasing it from a weight of 12.2 per cent in 2013 to 15.6 per cent in 2014.
Further improvements to the methodology for actual and imputed rentals in the National Accounts
will be introduced in BB16. The changes will result in further upward revisions in the expenditure
on imputed rents, which will in turn increase the OOH weight in CPIH, hence the decision to align
the OOH weights with National Accounts estimates and planned changes to be introduced in
BB16.
Weights are not usually revised in consumer price inflation statistics as this would lead to revisions
to the published indices. The value of updating weights when new information becomes available
is, in general, outweighed by user need for consistency, particularly when the index is used for
indexation. However, CPIH is a relatively new consumer price inflation statistic and its use is still
limited. In addition, CPIH has reverted to experimental status and revisions to the OOH price
component will be introduced in March 2015. Therefore ONS will use this opportunity also to make
retrospective changes to the OOH weight to align it historically and to reflect planned changes to
the measurement of imputed rents in BB16.
The revised weights are presented in figure 2.1 below, and illustrate that the planned BB16
changes would leave historic OOH weights significantly out of line with National Accounts, hence
the decision to align the weight for this item only.
5
http://www.ons.gov.uk/ons/media-centre/statements/blue-and-pink-books-2015-statement/index.html
Prior to Blue Book 2013, owner occupiers’ imputed rentals in the UK National Accounts were presented
with owner occupiers’ estimated expenditure on maintenance and repairs removed. To ensure full
compliance with ESA95, in Blue Book 2013, a revised methodology was implemented so that imputed
rentals are now presented on a gross basis (that is, including the estimation of maintenance and repairs
which was previously deducted). Further detail is available here: http://www.ons.gov.uk/ons/rel/consumertrends/consumer-trends/q1-2013/blue-book-2013--improvements-to-household-expenditureestimates.html#tab-Improvements-to-sources-and-methods
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Office for National Statistics
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Figure 2.1: OOH weight in CPIH (per cent)
Year
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Current OOH weight
10.0
9.9
10.5
10.5
10.7
10.6
10.7
11.6
12.2
15.6
BB16 revised OOH
weight
19.5
19.4
19.7
19.6
18.4
18.4
18.4
18.2
17.9
18.0
3. Impact on CPIH
This section presents the impact on CPIH of both revisions to the OOH index and weight so that it
is in line with National Accounts estimates.
3.1 Revising OOH index on CPIH
As noted in a previous article 7, following improvements made to the OOH index, the annual
average growth rate of OOH (for the period from 2005 to 2014) has been revised upwards by 0.6
percentage points to 1.5 per cent, presented in figure 3.1.
Figure 3.1: Previously published against revised OOH, 12-month growth rate
Per cent
3
Percentage points
3
2
2
1
1
0
0
Dif f erence (RHS)
-1
-1
Previously published (LHS)
Revised series (LHS)
-2
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
-2
Jan-15
7
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/improvements-to-the-measurement-of-owneroccupiers--housing-costs-and-private-housing-rental-prices/index.html
Office for National Statistics
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Figure 2.1 showed that OOH accounts for approximately 11 per cent of CPIH weight over the
period 2005-2014. The impact of this 0.6 percentage point upward revision to the annual average
growth in OOH results is a revision of up to 0.2 percentage points in CPIH growth, but more often
0.1 percentage points as presented in figure 3.2.
Figure 3.2: CPIH-Previously published against revised OOH index, 12-month growth rate
Per cent
6
Percentage points
0.6
5
0.5
4
0.4
3
0.3
2
0.2
1
0.1
0
0.0
-1
-0.1
-2
Dif f erence (RHS)
-0.2
-3
CPIH:Previously published (LHS)
-0.3
-4
CPIH: Revised OOH index (LHS)
-0.4
-5
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
-0.5
Jan-15
3.2 Revising OOH weight on CPIH
Revising the OOH weight in line with National Accounts estimates increases the OOH weight in
CPIH, over the period 2005-2014, from approximately 11 to 19 per cent. As presented in figure 3.3,
this difference is more pronounced in earlier years.
Office for National Statistics
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Figure 3.3: OOH weight in CPIH
Per cent
25
20
15
10
Current OOH weight
5
BB16 revised OOH weight
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
The impact of this revision to the weights is that the growth of the OOH component subsequently
has a greater impact on CPIH. Presented below, figure 3.4 shows the combined impact on CPIH of
both revising the OOH series and updating the OOH weight.
Figure 3.4: CPIH - Previously published against revised OOH index and weight, 12-month
growth rate
Per cent
6
Percentage points
0.6
5
0.5
4
0.4
3
0.3
2
0.2
1
0.1
0
0.0
-1
-0.1
-2
-0.2
-3
-4
-5
Jan-06
-0.3
Dif f erence (RHS)
-0.4
CPIH:Previously published (LHS)
CPIH: Revised OOH index and weight (LHS)-0.5
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Office for National Statistics
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Revision to both the OOH series and weight results in revisions of up to 0.5 percentage points,
downwards on CPIH annual growth, but more often 0.2 or 0.1 percentage points in both directions.
The downward revisions to CPIH from October 2009 are driven by the OOH component which falls
into greater negative inflation. This is perhaps better illustrated in figure 3.5 by comparing the
growth of CPI to that of OOH, the component that differs between CPI and CPIH.
Figure 3.5: CPI against OOH, 12 month growth rate
Per cent
6
CPI
OOH previously published
5
OOH revised
4
3
2
1
0
-1
-2
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Increasing the weight of the OOH component means that the OOH growth has a larger contribution
to the overall growth in CPIH. In simple terms, by increasing the weight of the OOH component, if
the growth in this component is above that of others (broadly CPI) that make up the CPIH, the
impact is to increase the CPIH growth. Conversely, when the growth in OOH is below that of the
other components the impact is to decrease the CPIH growth.
Annual growth of the new CPIH series now differs more against that of CPI as presented in figure
3.6, with the greatest difference between 2010 and 2011, driven by the OOH component falling into
negative inflation.
Office for National Statistics
6
Figure 3.6: CPI against revised CPIH, 12 month growth rate
Per cent
6
CPI
CPIH: Revised OOH index and weight
5
4
3
2
1
0
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
4. Next Steps
The revised series, presented within this article, result in a more accurate OOH index whose
growth is now more responsive to market conditions. The improvements to the OOH component in
CPIH and revising the OOH weights in line with National Accounts estimates will be introduced as
part of the 2015 annual update of consumer price indices published on 24 March 2015, with the
historical series recalculated back to 2005. Following the publication, ONS will work with the UK
Statistics Authority’s Monitoring and Assessment team to initiate the process for assessment of
CPIH as a National Statistic.
Office for National Statistics
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