May 23, 2022
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