Evolution of the Economy: The science of measuring rapid change in a complex, globalised and increasingly turbulent economic situation.

Statistically Speaking

Our topic this time, and it's a big one, is the economy. The science of measuring rapid change in a complex, globalised and now increasingly turbulent economic situation. In this episode Miles is joined by second permanent secretary Sam Beckett, and head of inflation, Mike Hardie, to look at how the ONS is keeping on top of rising prices, and how two of the biggest economic shocks in recent history have helped shape the Office for National Statistics' (ONS) current approach to collecting its key economic data.

TRANSCRIPT:

Miles Fletcher

Sam, one angle I'd like to explore with you is the extent to which everything has changed recently, and the way that the ONS measures the UK economy, the extent to which that was informed by the experience of what happened 14 years ago now and the financial crisis. Could you talk us through what happened there in terms of the ability of the statistical system to actually spot what was going on? And what lessons were learned during that period? Sam Beckett Yes, certainly. That is going back quite a while now, isn't it? But I think one of the key things that you can really compare and contrast with where we are now compared to then, is about the timeliness of GDP. Back at the time of the global financial crisis the Office for National Statistics was very slow to spot the turning point. We were dealing with crucial data for the economy's output. And it was probably about six months before we were able to sort of scale the downturn in the economy and see the economy going into recession. MF Meanwhile, during that period, of course, people were being hit quite badly by that economic downturn. But the official statistics that were available had nothing to say about what was happening. SB No, that's right. So we would have been waiting to find out the extent of the downturn as people were seeing it hit their livelihoods, for something like six months back in 2008. If you fast forward then to the experience that we've had over the pandemic. You know, our monthly GDP statistics are out about six weeks after the period they refer to so you're getting a very timely indicator on what is happening to the real economy now. So you can really compare a sort of six months gap to a six weeks gap now. And if you think about the way the pandemic played out with, you know, the economy being closed down to try and limit transmission and then opened up again successively, and in the waves, if we'd been waiting three months or six months to find out what was happening, it really would have been a hopeless situation. But we got those very timely official statistics on GDP, but not only those but even more timely statistics from business surveys, and opinions and lifestyle surveys that we've done, where we can actually get a two week turnaround on what is happening to the economy and how people are responding.

MF

So it was really a question of learning from that experience and putting in place the kind of mechanisms that can help us as a country to actually find out what was going on closer to the point it was actually happening out there in the real world. Has the rest of the world learned that lesson as well, or is the UK among countries that have been quicker onto this do you think? SB We're certainly one of only a handful of countries that publish a monthly GDP figure. So I think in that big kind of headline and official statistic, we're still in a relatively select group that publish as frequently as monthly and as close to the time. We're also looking at financial card transactions data; we are looking a lot at admin data on the labour force, and trying to bring together a host of statistics that shine a light on what is going on, on the ground during the economy. And I think we count ourselves amongst a relatively small group of national statistical institutes that are cutting edge in their use of innovative data sources. MF So by the time the pandemic then comes along, two years ago now, the ONS is in a better state to actually find out what's happening, but nevertheless, was there a certain extent to which the organisation had prepared for another downturn like 2008, rather than what actually happened which nobody had foreseen, a widespread pandemic including a serious risk to life? SB Indeed, I mean, who would have thought that you know, we would have been hit by a pandemic of such a global scale and impact? I think one of the things that is a huge advantage for the government and the UK economy has been to have this objective handle on the level of infection out in the community. And that is something that the Office for National Statistics signed up to deliver really early on in the pandemic. So, our COVID infection survey, which has now swabbed millions of people on their doorstep, gave us a great handle on just how many people have had COVID, not just relying on the data of people who were turning up at doctors and hospitals, who had symptoms already. So you know, the COVID infection survey was a more random sample of the community and gave us that objective handle on how many people had COVID and indeed, some of them asymptomatic, you know, no symptoms of COVID but tested positive on the doorstep and that gave us a great insight over the pandemic and helped advise the government on what should be done to try and limit transmission. MF So meanwhile, as well as setting up that very important survey, there were a lot of other very quick changes that were put in place as well to measure the economic impact, the impact on individuals, on businesses as well. Can you talk us through some of the work that was done there to give that very quick turnaround, the fast indicators, that quick view of how items in the shops are being affected; how people in the workforce were being affected; and how the country and the effects of lockdown - to what extent they were actually hitting the economy in real time?

SB I mean, starting with those quick turnaround surveys, there's two really that are really good companions to each other. The first is the business insights and conditions survey - and that surveys about 40,000 businesses and asks them questions around, you know, what is happening to their customer base, what is happening to their workforce. And there's about a two-week turnaround on that information. So, we could ask questions of businesses about how many of their staff, for example, they were intending to put on furlough and get that information just two weeks later to give us a handle on what a big uptake there would be on that scheme. The companion one is the opinions and lifestyle survey and through that we were able to ask people things like were they wearing a mask when they went to the shops? You know, were they staying at home as per the guidance and what were they leaving the home to do? And you know, were they washing their hands more and all those non pharmaceutical interventions that were so important in controlling the early stages of the pandemic. And again, between that sort of survey of households and individuals and businesses, you could track those two sides of how the pandemic and the government's measures to control it were impacting on people's lives and livelihoods. MF So in the old world of statistics, where paper forms would have been sent off, we'd have been able to produce an estimate in, ooh I don't know, a couple of months. But actually with the onset of the pandemic, this information was being fed into government, directly into government within a matter of a few days and informing that response, the actual action that was being taken on the ground. SB Absolutely. And I think also looking at some of our more traditional statistics, there had to be huge effort to keep the show on the road. Labour market statistics, I mean, incredibly important, over a period of economic turbulence, we had to go from what had been a face to face survey to a telephone based survey. And we reinforced that picture by getting information from payrolls from HMRC’s PAYE database, to understand what was happening to the labour market and keep that total picture, even though our standard survey had to move rapidly to a telephone based one. But I should add, you know, when people think about that admin data, I would like to emphasise that we're incredibly careful that none of that would identify anything about individuals. And we're extremely careful to ensure that we don't collect data that we don't need and that everything is de-identified. MF And that's a very important point now, because it's not just a question of people taking part in surveys is it? It's about the ONS having relationships with the credit card companies, for example, with mobile phone providers as well. And while these huge datasets give a fantastic up to the minute picture of of what's going on - money being spent and how movement is being affected as well - people are going to be understandably concerned about government having access to that sort of data. So how do we ensure that that is working in the public interest, only producing information that's genuinely needed for the public good?

SB

Our reputation rides on treating people's data incredibly carefully, and by abiding by all the regulations that are appropriate to personal data and business data. So we're incredibly scrupulous and careful in this regard. We don't gather data that can identify people if it is not needed, and we have got very reliable methods to de-identify data before we use it for analysis or indeed publish it. So you know, that's incredibly important to maintaining public trust in our statistics. MF So what have we been doing to try and measure the individual impacts that some of the price rises we've seen recently have had on households with different incomes? SB We are facing a period of some time to come where I think this is going to be incredibly high profile in the public debate about the challenges of the economy and what people are facing and indeed of measurement for us as an office of statistics. What we've been doing is trying to think about ways in which you can dig under that very average national figure of inflation. Now that is going up and most forecasters, such as the Bank of England will expect it to go up further, but it does, as you say, fail to show how different people can be impacted. You know, if they drive a lot and the cost of fuel has gone up a lot, relatively poor households spend a high proportion of their money on energy bills and on food and we know that both of those categories have been affected. So we have published some statistics that seek to look at inflation cut by different income brackets of households. MF Given that there is now so much data from supermarket scanners, from credit cards, from an incredible range of digital sources. What are the limits of all this do you think? SB Data is a by-product of the productive economy these days, isn't it? You know, data is being produced in all the other activities that we undertake online in our lives. So along with that, computing power has got so much cheaper and you put those two things together, and you just have this enormous capacity to measure activity in so many different ways, and so much more up to date, I mean, compared to anything we could have done, instead of 10 years ago, or 20 years ago, and the cost of them has come down massively. And with that, the sort of potential to get insight from them has expanded. MF Now we’ve mentioned GDP several times of course – that’s Gross Domestic Product - the traditional very long-established way of measuring activity in the economy. And it's held by many still to be the single most important national economic statistic. But at the same time, there's a debate going on at the moment about the continuing usefulness and relevance of GDP, particularly as it takes no account of the environmental dimension as well. And of course, in this country and internationally, that environmental dimension and climate change has become evermore important. So what are we doing as an organisation to factor the environment into the economic picture? SB GDP is an important measure of the productive economy. I think it's here to stay. But even in terms of it measuring the productive economy we're continually trying to improve its quality and make it more timely as we've talked about, but also more granular, you know, get more of a sense of what is happening down at a more granular level of geography. What we're trying to do is develop further, all aspects of our kind of economic welfare measures and bring things into the kind of spotlight that GDP has that are really important to all our futures. And I think, you know, climate and net zero, and those environmental statistics are one area where we're working really hard to try and give them a due prominence. I mean, we are relatively far ahead of international averages in terms of our level of development here. We've been publishing natural capital accounts for some 10 years. So we're starting from a good base, but there's so much more we can do. So, we've got two strands of work here. First, we've got an approach which tries to extend that concept of GDP, the production and asset boundaries that it measures to natural capital in the environment, as you've mentioned, but also human capital, as well. You know, the extent to which the skills of the UK workforce are being enhanced, and other aspects of economic activity, which currently fall outside of GDP, like household production, like unpaid for household work, which also really ought to be in your concept of how productive you are as an economy. So, we're developing this suite of measures that sort of extends the national accounts into these harder to measure areas that we also know are really important to our sense of economic progress and prosperity as a nation. And so that's that sort of integrated set of extending the concept of GDP to these broader concepts. But also, alongside that, we are doing some things that are a little bit more tactical and fleet of foot. They have a framework to them, like our Climate Statistics Portal, but that brings together all kinds of climate statistics from across government into a kind of one stop shop for users to explore things like climate and weather and emissions by different area, impacts and mitigations and provide insights from that. Now, not in a way that you can really aggregate with the GDP number, but in a way that would give you sort of broad insight as to progress towards net zero and what is happening to our climate and weather. So, this is a huge agenda. We call it the ‘Beyond GDP’ agenda, something where we are a relatively leading internationally but so much more work that we can do. We've got some really interesting stuff coming out later this month that will look at some of these issues and you can obviously catch up with that on our website. MF So much more change still to come. Finally, Sam Beckett, a very wise economist once said - slightly tongue in cheek – that the chief function of economic forecasting is to make astrology seem respectable. Do you think the point will come at ONS when the data becomes so good and so rapid, that actually the ONS could get into the whole business of forecasting the economy with a great deal of accuracy? SB Well, I think we are increasingly getting up to the moment, if I can put it like that in terms of our economic statistics. Yes, there's still some time lag between the observation and the publication of the data in in most cases, but we're getting closer and closer. And we are using techniques where even where some data might be missing, we can use sophisticated economic modelling techniques to bring it up to date. So, a good example there would be if we didn't have a full local breakdown of GDP data for last month, we could make up for that using what we know about the other areas, and how they changed in GDP, and also the past performance of the missing areas. So, we can put together this picture that brings things really up to date using some of those modern techniques. I think the world of measurement is different from the world of forecasting, quite fundamentally. And, you know, we leave that to colleagues at the Office for Budget Responsibility and the Bank of England, who do kind of look ahead and try and paint that future picture. But the two are interconnected. And I think you can only produce good forecasts, if you've got really reliable readings on what is happening now and what past trends have been. So, they are hand in glove and I wouldn't want to say those were two distinct but we do have our own particular objective, which is about you know, economic and societal measurement. We're not yet in that forecasting game. But we are bringing it as up to the minute as possible. MF So, while not actually trying to predict the future, at least we can measure the very, very recent past. Sam, thank you very much for speaking to me.

Now, after decades of relatively low inflation, rising prices are back in the news. Tracking the impact of that on households is of course, vitally important work and at the ONS, that's the responsibility of the head of inflation, Mike Hardie.

Well, Mike, anyone who follows the news and particularly recently with concern about the rising cost of living will understand the importance of inflation. But there are lots of different measures of it. Can you talk us through the different ways in which ONS measures inflation, and why each of them is significant? Mike Hardie So we have a range of inflation measures. The first family of statistics are consumer price statistics. And so we have the consumer prices index which most people will be familiar with and the consumer prices index including owner occupied housing costs, and they are our macro economic measures of inflation that are based on economic principles. We also have a second group of statistics which are called the household cost indices, and they are specifically designed to measure the changing costs and prices faced by different household groups. And that completes our family a consumer price statistics. And then beyond those, we produce business prices. So those measure what we describe as output or ‘factory gate’ prices. So those are the prices of goods leaving the factory gate and we also produce input prices as well. So all of the component parts that are used in the production process to produce a final product, how the price of those has changed over time, too. And that completes our business statistics. And then beyond that, we also produce house prices as well, which is very topical at the moment given the buoyant housing market in the UK. MF And underlying all those different measures of inflation is a very large data gathering operation. Now, there's a lot of change going on in that area at the moment, but first of all, describe for us how this traditionally has been done. MH Traditionally, in order to produce our consumer price statistics, we have sent price collectors out across the UK. We have over 300 price collectors, they go to over 140 different locations in the UK, with mini clipboards, and they go into stores and they price a range of different items. So at the start of the year, we construct a large shopping basket, a virtual shopping basket, which is based on what UK consumers spend their money on. And there's a list of approximately 700 different items. And we send the price collectors out to collect information on those items. And we also have some collection within the ONS as well. So we have a couple of teams that go online and collect a wide range of prices too. We also have some admin data as well. So for example, we get admin data on how the price of insurance has changed. And then we aggregate all of that data together to construct our consumer price statistics. MF Rail fares of course are always a big driver of inflation as well. Where does that come from at the moment? MH So that comes directly from the uplift that consumers face every year. So, when rail fares are increased on an annual basis, we capture that increase in our inflation measures. But one of the developments that we're actually undertaking at the moment is to move to using data from the rail delivery group. So that's essentially a census of all rail journeys in the UK. So, it gives us a much more detailed picture of how rail prices are changing across the country. MF So, we have groups of people out with clipboards, moving up and down the aisles in the supermarket; people looking at the web; some companies like rail companies, obviously providing information about their fares. But was that sufficient to provide a really good accurate measure of inflation or was it felt that there was much more that can be done MH So, it was sufficient to provide a high -level accurate measure of inflation. These are economy wide averages that we publish on a monthly basis. We're moving away from the manual collection that I described, where we send price collectors out into stores, where we are working with a number of leading retailers to get access to their electronic point of sale data. So, whenever you go to a supermarket for example, and spend money on your weekly shop, that information is captured by the retailer. We have a number of partnerships in place. Co-Op are one of the retailers that are happy to be named, where we get information directly from their supermarket tills directly to our systems at ONS, and we can use that data then instead of sending people into stores to compile our inflation estimates. And that data is extremely detailed. So, when we send people into store obviously there's cost implication to that. And they collect prices of narrowly defined items. So, they may for example, go in to collect the price of a loaf of bread off the shelf - we try to price the most commonly available item. What the electronic point of sale data will give us is a census of all of the prices within that store, and more importantly, not just the prices, but how much of each product have been purchased by consumers. So that fixed basket approach that I mentioned, where we set the basket at the start of the year, that will change likely for areas of the basket where we're using these new data sources, because it'll essentially be a dynamic basket that updates every month because we will have a summary of what consumers are spending their money on in real time which is really exciting. MF That's a real step change in approach then. How does the UK compare - are other countries doing this, moving away from the traditional approach into this much more dynamic and data driven way of setting inflation? MH It’s the general direction of travel. So other National Statistics Institute such as the Netherlands and Australia have been doing this. It's really difficult to do, because utilising those new data sources such as scanner data requires the development of new methods, and also new systems as well. So just to give you an idea of the size of some of these data sources. We currently use around 200,000 price quotes to compile our consumer price statistics every month at the moment. And it's likely we'll be moving to several hundreds of millions of prices every month. So, we need to change our systems in order to manage the sheer size of the data essentially. MF This really is big data in action.

MH

It is really exciting and gives you additional insights into changing consumer spending patterns and how prices are evolving across the UK economy. MF Does that mean the annual updating of the basket of goods - which is always quite a popular occasion as we look to see what's in and what’s out - is that going to go then? MH Not in the short term. So, there are specific areas of the basket that we're targeting with these new data sources. I've mentioned groceries, we've also touched on rail fares already and also used cars. But for the remainder of the basket, we will use traditionally collected data, so sending people out into stores and data that we've received directly and collect at ONS. So, we will still need to update that basket to reflect wider consumer spending patterns. Also, if you think about groceries, we have these new data sources for larger retailers. But in order to ensure that our statistics remain representative of price changes in the economy, we also need to capture prices from smaller retailers as well. Some of them won't have the facilities to provide us with data - so there will still be an element of manual collection. MF Now all this change - and very exciting change too - comes at a time of heightened concern about the rising cost of living and also the frequently expressed opinion that what appears to be the headline rate of inflation doesn't actually reflect people's own experience of rising prices that they face, particularly recently in the supermarket. How has the ONS been responding to that? MH So, the inflation measures that most people are familiar with such as the consumer price index is an average and when you dig into that average there will be some variation. So, everyone has their own personal rate of inflation depending on what you spend your money on. So, in terms of how we responded as an organisation, you can go on to the ONS website, and use our personal inflation calculator and outline what you were spending your money on every month. And based on that spending pattern we can work out your personal rate of inflation and how that compares to the headline. We're also undertaking some work on a set of measures called the household cost indices. And these are designed to measure the changing costs and prices faced by different household groups. So, you can break down those statistics into income decile you can break them down to expenditure decile, households with or without pensioners, and with or without children. So, you can see how changing prices and costs are affecting different household groups. And another piece of work that we're doing at the moment that’s particularly interesting is we are aiming to publish over the next month a low cost index. So, this has been widely covered in the media, where some consumers who purchase value brands in supermarkets are being forced to move to more expensive brands because those value brands are no longer available. So, what we are looking at is for the price of those lower priced products when people are forced to move to higher priced products, what that means for price changes and the implications for the household budget on a weekly basis. So that's another piece of work that we're doing to provide further insights into the recent rise in the cost of living and how that's impacting different groups of people. MF And that could shed important light on people's actual experience of shopping when they find out that the cheap packet of pasta they used to buy simply isn't there anymore. MH Yeah, so one of the fundamental principles of a price index is that we control for quantity and quality changes over time, because we want to isolate that price change. So, what you've just described there wouldn't necessarily be captured by a price index, but it obviously has implications for people in terms of the household budget. So, we're looking at producing, you know, a range of supplementary statistics to complement our headline measures of inflation, to provide insights into these types of changes, which are having an impact on people's household budget. MF Now one of the big debates, one of the big issues surrounding the measurement of inflation in recent years, has of course been the retail prices index. Tell us a little bit about that - the criticisms of the RPI as a statistic, as a measure of inflation, and how ONS has responded to that. MH So we currently produce the retail prices index as a legacy measure of inflation. Our position on this statistic has been clear for some time. We think it is a poor measure of inflation, that tends to over or underestimate inflation. And we don't think it has the potential to become a good measure either. And if you were to address all of the shortcomings of the retail prices index, you move close to our headline measure of inflation, which is the CPIH, which is the consumer prices index including owner occupiers housing costs. So, we made a proposal to bring the data sources and methods from the CPIH into the RPI and that is due to take place in 2030. But we only produce it currently as a legacy measure as we acknowledge as an organisation that it is used for a wide variety of purposes across the economy. MF So, we've had the CPI measure of inflation for quite some time. It's very important of course, it's used by the Bank of England to target the reduction of inflation. It's also used very widely around Europe. But it doesn't include that measure of housing costs. Why is it so important to include housing costs as an element? What are the challenges of measuring that given that some people live in their own houses and other people rent them? That's the problem isn't it - trying to measure how those costs are changing for different people. MH It's a large part of people's expenditure every month. So, it's essential that it is reflected in our inflation measures. It's conceptually quite challenging to measure. So, we use an approach called rental equivalence and we use rental prices as a proxy for owning and maintaining and living in your own home. And we have very detailed information for the valuation office agency, which we use to compile our measure of owner occupiers housing costs. MF And that comes up essentially within a notional figure of what it would cost you to rent your own home. MH Essentially, and this is the direction of travel internationally as well. So other NSIs are moving towards using a measure including owner occupiers housing costs. At the moment, the consumer prices index is the Bank of England's inflation target and is widely covered in the media every month, but our aim in the medium term is to move our stakeholders towards using the CPI. MF Looking into the future then, a lot of exciting changes going on. And we continue to report inflation on a monthly basis. Can you see the time when perhaps there might be a more frequent reporting of inflation, perhaps even coming down to weekly or even daily? MH That is possible with the new data sources - we could produce more timely estimates. Producing our inflation statistics on a monthly basis is really challenging. It's quite a tight timetable, you know, to send price collectors out to bring in all admin data sources, and in future, the scanner data that we've discussed, as well. So, there's quite a tight turnaround. So, it's very likely that CPI and CPIH will continue to be produced on a monthly basis, but it is possible that we could produce supplementary statistics that are maybe more timely, but our focus at the moment is improving our headline measures of inflation. MF Inflation in the news, as it hasn't been for many years at the moment - you must be very conscious of the impact that your numbers have when they come out. Describe for us the importance of the work that you're doing. MH Well inflation statistics impact pretty much every aspect of UK society. They’re used to uprate pensions, government guilts, student loans, various benefits, taxes. So, we have a very low risk appetite in terms of transforming our statistics because it is absolutely essential that we get them right because the implications are enormous if we do not. And that's been one of the challenges in bringing in these new data sources and developing new methods and systems. We've had to move carefully. We're very ambitious, but it needs to be measured ambition, because we need to ensure that while transforming our consumer price statistics we get them right, and produce robust statistics that are used across the UK economy. MF Because once reported, there's no going back - there are no revisions to inflation are there? MH No, so RPI is an un-revisable index, so we do not revise. And for CPIH and CPI, there is some scope to revise the indices, but it would have to be extreme circumstances for us to do that. And thankfully, to date, we haven't had any errors in CPIH or CPI so we haven’t had to cross that bridge just yet. MF Thank you for listening to Statistically Speaking and please join us for our next episode, which is quite literally a matter of life and death. To ask a question or suggest ideas for future podcasts, please do so via our Twitter feed @ONSfocus. I'm Myles Fletcher and our producers at the ONS are Steve Milne and Julia Short.

ENDS