29 Jul 2013

Did We really Avoid Double Dip Recession?

In her article The ‘secret deflator’ used to fiddle the GDP figures, Merryn Somerset Webb of Money Week, points out an oddity in the way the ONS calculates inflation for adjusting GDP changes. In this graph the GDP adjusted by the Retail Price Index (RPI one of the main measures of inflation, in blue) is compared to GDP adjusted by the ONS figures (grey).

Note that since 2011 the figure used for inflation has been very much lower than the RPI. So at present the ONS figures on GDP are much higher than they would be if they used the RPI figure for inflation. 

In a comment on the blog by Shaun Richards points to another blog, Why was the calculation of UK GDP changed? Lower recorded inflation so higher growth?, where he explains the difference. It is because in 2011 the ONS made the decision to switch from using a figure based on the RPI to a figure based on the Consumer Prices Index (CPI). He cites the ONS:
However, CPI has a number of advantages over the RPI for this purpose, as discussed below, and the international guidance is clear that the CPI should be using [sic] in preference.
And he comments: 
"Missing in the list of advantages is that fact that the CPI tends to give a lower number for inflation than the RPI sometimes substantially lower!" 
One of the main reasons for the CPI giving lower figures is that RPI includes housing costs. And housing costs have been steadily rising for years now due to the chronic shortage of housing in the UK. The logic of excluding the cost of housing escapes me.

Had we continued to use the same measure of inflation to adjust the figures throughout, then GDP growth would still be negative. Not on did we not avoid a double dip recession, but we are still in that recession! Ah the joy of statistics.

All credit to the two authors whose work I am citing here. Please read the original stories. It is worth reading the comments on both blogs for further informed comment on this issue. 

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Keep is seemly & on-topic. Thanks.