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Retail and Consumer Prices, 1955-1963

Published online by Cambridge University Press:  26 March 2020

W. A. H. Godley  and
D. A. Rowe
W. A. H. Godley
Affiliation:
National Institute
D. A. Rowe
Affiliation:
National Institute
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Extract

This paper gives an account of a method of forecasting the Ministry of Labour's retail prices index, and of deriving from it a forecast of the consumer price index. (This is the index used in the National Income statistics to deflate the value of consumers' expenditure to volume terms.) Good forecasting obviously has to be based on a correct analysis of the factors which determine price changes; the article throws light on the way in which cost changes are taken into account when prices are changed. It seems that retail prices (apart from seasonal food prices) do not respond directly to short-term fluctuations in demand and output. Businessmen do not raise prices because demand suddenly rises; nor on the other hand do they lower them when output moves up sharply and unit costs fall. The analysis, therefore, provides further support for the ‘normal cost’ theory of pricing—that businessmen set prices by calculating their costs when working at some normal capacity, and add a conventional margin.

Type
Articles
Information
National Institute Economic Review , Volume 30 , November 1964 , pp. 44 - 51
Copyright
Copyright © 1964 National Institute of Economic and Social Research

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Footnotes

This article has been prepared by W. A. H. Godley and D. A. Rowe of the National Institute. Mrs. M. G. Hill was in charge of the computing at the Institute. We are grateful to the Board of Trade for considerable statistical assistance, and to Mr. J. H. A. Dunwoody and the Agricultural Experimental Station at Rothamsted for the electronic computation of vast numbers of regression equations.

References

Note (1) page 44 Published monthly in the Ministry of Labour Gazette.

Note (2) page 44 Seasonal foods are largely home-produced; consequently the underlying trend might be expected to have a more systematic relationship with other home prices than with the prices of non-seasonal foodstuffs, which are largely imported.

Note (3) page 44 Sometimes it is possible, on the advice of the Ministry of Agriculture, to incorporate firmer information relating, for example, to expected acreages or yields.

Note (4) page 44 This covers rent, rates and repairs, etc., with weights of 36, 30 and 21 respectively in the 1956-61 index.

Note (1) page 45 See R. R. Neild, Pricing and Employment in the Trade Cycle, N.I.E.S.R. Occasional Paper no. 21, Cambridge University Press, 1963, for an extended discussion of the theoretical implications.

Note (2) page 45 The hypothesis does not rule out the possibility that prices are responsive to both demand and costs in opposite directions to an equal extent.

Note (1) page 46 That is, in so far as average hourly earnings rise because of a cyclical increase in overtime, this increase should be excluded.

Note (2) page 46 Our hypothesis is that, in general, prices will not rise in response to an increase in hourly earnings which results from more overtime. But when hours worked do not fall by the full amount of negotiated cuts in the standard week, then there will be an increase in overtime of a manifestly cost increasing nature.

Note (3) page 46 See L. A. Dicks-Mireaux and J. R. Shepherd, The wages structure and some implications for incomes policy’, National Institute Economic Review no. 22, November 1962, page 38.

Note (4) page 46 The formulation in the regressions allowed for the possibility that payments not covered by the wage-rates index do not rise quite smoothly but respond in some degree to the same influences as wage rates.

Note (5) page 46 See Appendix, page 52.

Note (6) page 46 That is, the abolition, at the beginning of the period, of the bread subsidy.

Note (1) page 47 There was a sharp increase in the recorded import price of sugar at the beginning of 1957 when the change was made, raising the whole import price index for food about 3 per cent. For our purposes part of this rise was fictitious.

Note (2) page 47 For this reason, no special allowance was made for agricultural subsidies. The prices of most of the foodstuffs in this group were settled in market competition with imported products; agricultural subsidies made up the difference between the market price (with which we are concerned here) and the price actually paid to the farmer (with which we are not concerned).

Note (1) page 47 See R. R. Neild, Pricing and Employment in the Trade Cycle, N.I.E.S.R. Occasional Paper no. 21, Cambridge University Press, 1963.

Note (1) page 48 This increase in productivity is plausible, however (a little less than in the economy as a whole) since a relatively high proportion of consumers' expenditure goes on services.

Note (2) page 48 See W. A. H. Godley and J. R. Shepherd,’ Long-term growth and short-term policy’, National Institute Economic Review no. 29, August 1964, page 26.

Note (3) page 48 See the footnote to the chart, and the Appendix page 53, for the derivation of the chart figures.

Note (1) page 49 We carried out some experiments to see whether the introduction of demand or output variables would improve the explanation of price changes, but in no case did they do so.

Note (2) page 49 The mean error was 0.27 points.

Note (1) page 50 The Ministry of Labour retail prices index is based on an expenditure pattern which excludes some high-income house holds at one end of the scale, and excludes those dependent on national insurance pensions or national assistance at the other. It is a base-weighted index up to the beginning of 1962, and has subsequently been reweighted each year according to the revised patterns of expenditure, introducing in this way an element of current weighting.

Note (2) page 50 It is not possible to separate out seasonal food in the consumers' price index.

Note (1) page 51 This analysis is put under suspicion, to some extent, because of the introduction of an element of current weighting into the retail price index since the beginning of 1962. It may well be, in view of this, that the two indices will move more closely together in the future than they have in the past.

Note (2) page 51 This was so even though the retail price group was corrected in advance for ‘seasonal’ variations in the price of coal. This correction was applied because it has not occurred at quite regular intervals.