Silly season for statistics

23 May 14
Headline figures should be treated with care as a measure of living standards. What they leave out can matter just as much

By Gavin Kelly | 23 May 2014

Headline figures should be treated with care as a measure of living standards. What they leave out can matter just as much 

It’s already a cliché to say that the next election will in no small part be about living standards. And, because of that, every new piece of relevant data is scoured to see if it confirms competing views about what is likely to happen to household budgets over the next year during a period of recovery.  

We should treat all reports of these statistics with care.  While they often tell us something useful, they rarely if ever reveal the full story. And they are easily overstated or mis-used. 

Take wages. For starters, the regularly reported official statistics exclude the 4.6 million self-employed, whose ranks have swelled just as their typical weekly earnings have crashed. In addition, there is a question over how these statistics take account of millions of employees in workplaces with fewer than 20 staff.

Headline pay statistics are also significantly affected by bonuses. Indeed, last month’s ubiquitous press coverage of the fact that wages had caught up with inflation only holds true if we include bonuses. If we look at regular pay, then real wages are still falling. The famed crossover point between wages and prices simply hasn’t happened.   

Add in the uncertainty over different measures of inflation and things get even murkier. Of the two standard measures one, the Consumer Prices Index, is thought to be too narrow to give a proper indication of living standards as it excludes housing costs. The other, the Retail Prices Index, gives persistently higher rates of inflation and takes housing costs into account – but it is thought to be technically flawed. 

What’s more, the gap between CPI and RPI – already significant – is set to grow as interest rates rise. It’s a mess: as things stand we don’t have a recognised measure of inflation that is appropriate for a discussion of living standards.    

To get to grips with living standards we should be considering real disposable household incomes, not pay. The Office for National Statistics produces an official measure, Real Households’ Disposable Income, that the media often report as a judgment on what is happening to household living standards. 

Sadly, in the Pythonesque world of official statistics the measure doesn’t reflect what it says on the tin. It is an aggregate figure for the economy (so it rises with population growth), and it includes various items that have nothing to do with household living standards. Nonetheless, it still gets reported – and cited by political parties – as if it is the oracle on these matters.  

Fortunately, there is a way of getting at what is really happening to household incomes: authoritative surveys provide what should be reliable information.  The trouble is, they are painfully slow to emerge. Today, we only know what the position was in 2011/12.

This uncertainty about whether we are measuring living standards properly might be part of the reason that when economic news improves we see shifts in public sentiment about prospects for the overall economy but little movement in perception of personal prospects.  

It’s only because the issue of living standards has acquired such salience over recent years that inadequacies in how we measure these things have come to light. Some recent big shifts in the economy, like the surge in self-employment, make official statistics even less meaningful than in the past. 

Amidst all this uncertainty there are two things about living standards in May 2015 that we can say with confidence. One is that it will be possible for different political parties to use some ‘official statistics’ or other to prove whatever story they want to tell. Prepare to be bludgeoned with contradictory accounts. 

And, second, there will be a true story about what is really happening to living standards come polling day – it’s just that we won’t know what it is until halfway through the next parliament. 

Gavin Kelly is chief executive of the Resolution Foundation. He will be speaking at the CIPFA Annual Conference in London, 1–3 July 2014

This feature was first published in the June edition of Public Finance magazine


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