SlideShare ONS Economic Forum Slidepack - 18 September 2023

ONS Economic Forum
Chair – Grant Fitzner
@ONSfocus #ONSEconForum slido #26920
Chief Economist
Director, Macroeconomic and
Environment Statistics and Analysis
@GrantFitzner

Agenda
09:30am – 09:35am Welcome and introduction – Grant Fitzner, Chief Economist, ONS
09:35am – 09:50am State of the UK economy – Sumit Dey-Chowdhury, Deputy Director,
Economic and Microdata Insights, ONS
09:50am – 10:00am Persistence in Consumer Price Inflation – Graeme Chamberlin, ONS
10:00am – 10:10am Changes in labour costs and prices – Christina Palmou, ONS
10:10am – 10:25am Questions and answers
10:25am – 10:30am Closing remarks – Grant Fitzner, Chief Economist, ONS

Blue Book 2023
@ONSfocus
Revisions are a natural part of our compilation of GDP – timeliness vs accuracy
• The UK is a large and complex economy, so it takes time to be able to bring together all the
information we need to produce a full picture of the economy (e.g. 2-3 years)
• We need to revise our estimates as new information becomes available – for example,
how much output was produced by each industry or what inputs were used in production
• Our annual Supply-and-Use Tables approach allows us confront detailed data at a granular
product and industry level, giving us more accurate estimates of the economy
The Coronavirus (COVID-19) pandemic made this process even more challenging
The next quarterly GDP estimates, to be published on Friday 29 September, will include our
recently announced annual revisions for first time
#ONSEconForum slido #26920

Revisions to GDP
75
80
85
90
95
100
105
2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4
2019
Q4
=
100
Vintages of Real GDP
Blue Book 2021 Blue Book 2022 Blue Book 2023
-1.5
-1.0
-0.5
0.0
0.5
1.0
1990 1995 2000 2005 2010 2015
Revision
Revisions to First Estimates of GDP
Source: ONS, Impact of Blue Book 2023 changes on gross domestic product, 1 Sept 2023
@ONSfocus slido #26920
#ONSEconForum

Forthcoming National Accounts publications
Friday 22
September
1. Detailed assessment of changes to institutional sector accounts: 1997 to 2021
2. Detailed assessment of changes to balance of payments annual estimates:
1997 to 2021
Monday 25
September
1.Follow-up to Global Context in the UK National Accounts: Blue Book 2023
2.Improvements to healthcare volume output in the Quarterly National Accounts
Friday 29
September
Quarterly National Accounts
(changes announced on 1st September included in GDP release for the first
time)
Mon 9 October Summary of changes to Blue Book table structure
Mon 23 October Methodological article on Net Domestic Product
Tuesday 31
October
1.UK National Accounts, The Blue Book 2023
2.UK Balance of Payments, The Pink Book 2023
GDP analytical article on revisions performance (TBC)

State of the UK Economy
September 2023
Sumit Dey-Chowdhury
@ONSfocus #ONSEconForum
Deputy Director
Economic and Microdata Insights
Office for National Statistics
slido #26920

Recent economic activity has been volatile
-1.0
-0.5
0.0
0.5
1.0
1.5
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22
Per
cent
Change in Monthly GDP
Month/ Month 3m/3m
Source: ONS – Monthly GDP
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15
Arts entertainment and recreation
Professional scientific and technical
Other services
Public administration and defence
Financial and insurance
Activies of HH as employers
Accomodation and food service
Real estate
Wholesale and retail trade
Transportation and storage
Education
Administrative and support
Information and communication
Health and social work
Percentage points
Contributions to Change in July GDP
Source: ONS – Monthly GDP

Underlying inflation in the UK is still elevated
Source: ONS – Consumer Price Inflation, UK Source: OECD
Core Inflation, G7
Canada France Germany Italy Japan UK US
Feb-23 4.8% 3.8% 4.3% 3.9% 2.1% 6.2% 5.4%
Mar-23 4.4% 4.0% 4.5% 4.2% 2.3% 6.2% 5.4%
Apr-23 4.2% 4.1% 4.7% 4.5% 2.5% 6.8% 5.3%
May-23 3.8% 4.2% 4.8% 4.7% 2.6% 7.1% 5.0%
Jun-23 3.7% 4.3% 5.0% 4.8% 2.6% 6.9% 4.6%
Jul-23 3.6% 4.3% 5.3% 4.9% 2.7% 6.9% 4.5%
0
2
4
6
8
10
12
Per
cent
Consumer Price Inflation, UK
Headline CPI Core CPI

Forward indicators point to a slowing in inflation
Source: ONS – Consumer price inflation, UK and
Producer price inflation, UK
Source: ONS – Business Insights and Conditions Survey
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
Jan Feb Mar Apr May Jun Jul Aug
Change in Input Prices vs Expected Sales Price
Net balance, prices bought
Net balance, sale expectations
-5
0
5
10
15
20
Per
cent
Consumer and Producer Price Inflation
Goods CPI Output PPI

There are signs of a cooling labour market, but
domestic inflation remains high
Source: ONS – UK Labour Market Source: ONS – Average Weekly Earnings in Great Britain
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Jan-23
Vacancy/ Unemployment
-4
-2
0
2
4
6
8
10
Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17 Jan 19 Jan 21 Jan 23
Per
cent
Nominal Wage Inflation
Total Pay Regular Pay

UK labour market tightness has been more
reflective of supply constraints
Source: Bureau of Labour Statistics
28
29
30
31
32
33
34
35
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Millions
UK Labour Demand and Supply
Labour Supply
Labour Demand
130
135
140
145
150
155
160
165
170
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Millions
US Labour Demand and Supply
Labour Supply
Labour Demand
Source: ONS – UK Labour Market

Personal finances have improved
Source: GfK Source: ONS – Opinions and Lifestyle Survey
Note: %age of adults reporting their cost of living has increased over the last month
-50
-40
-30
-20
-10
0
10
20
Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-22
Personal Financial Situation
Last 12 Months Next 12 Months
0
10
20
30
40
50
60
70
80
90
100
Nov-21 Mar-22 Jun-22 Oct-22 Feb-23 Jun-23
Trends in Cost of Living Increases

Recent forecasts point to a slightly improved
outlook for this year
HMT, Forecasts for the UK economy
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23
Real-time 2023 GDP forecasts
Range
Median
0%
2%
4%
6%
8%
Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23
Real-time 2023 Q4 CPI forecasts
Range
Median
HMT, Forecasts for the UK economy

Conclusions
• Inflation persistence remains a focus for policymakers
• There are some signs that the labour market is cooling,
yet wage inflation still remains high
• Consumers are reporting an improvement in personal finances

Persistence in consumer
prices inflation
Graeme Chamberlin
Economist
Economic and Microdata Insights

Consumer prices inflation in the UK
Consumer price index (CPI), 12-month % change
%
Sources: Consumer price inflation and Consumer price inflation, historical data, (1950-1988)
October 2022: 11.1%
Highest rate since
October 1981
Peak inflation
August 1975: 24.5%
July 2023:
6.8%

What is inflation persistence?
We describe inflation persistence as the underlying
trend inflation rate in the economy – common across all
the goods and services making up the CPI.
We published an article on 21 August 2023:
Persistence in consumer prices inflation, UK: 2002 to 2023

Inflation persistence and core inflation
“The name of the game then was distinguishing the signal from
the noise, which was often difficult. The key question on my mind
was typically what part of each monthly observation on inflation
is durable and what part is fleeting?”
(Alan Blinder,1997)
Last October we published this article:
New estimates of core inflation, UK: 2022

Methodology
For each of the 85 goods and services (i = 1, 2, …, 85) in
the CPI we use filtering techniques to split the inflation
rate into a common (St) trend rate and a specific individual
component(ϵi,t):
CPI1,t = St + ϵ1,t
⋮ ⋮
CPI85,t = St + ϵ85,t

The common trend in CPI inflation
Recent falls in CPI inflation reflecting energy and food
Inflation rates
(July 2023)
CPI: 6.8%
Persistence: 6.9%
%
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
CPI all-items Common trend (persistence)

Top 10 most persistent inflation items
Those goods and services with a strong correlation to the
common trend rate (high signal-to-noise)
* Why are personal/housing
services good indicators of the
underlying trend inflation rate in the
UK economy?
Research from the FRB NY finds
that services inflation tends to be a
more important driver of core
inflation than goods inflation
because it more closely follows
longer-term inflation expectations
and conditions in the labour market.
CPI item
11.1.1 Restaurants & cafes
03.1.4 Cleaning, repair and hire of clothing
04.1 Actual rentals for housing
07.2.1 Spare parts and accessories
12.1.1 Hairdressing and personal grooming establishments
11.1.2 Canteens
09.4.1 Recreational and sporting services
07.1.1A New cars
09.2.1/2 Major durables for in/outdoor recreation
06.2.2 Dental services

Inflation in restaurants and cafes
Historically - a fairly good measure of underlying inflation
trends in the UK, although some more recent deviation.
*Eat-out-to-help
out impacted the
restaurants and
cafes inflation
rate in August
2020 and August
2021.
%

Top 10 least persistent inflation items
Those goods and services with a poor correlation to the
common trend rate (low signal-to-noise)
* Energy-related items, inflation
rates are volatile relative to the
common underlying trend rate of
inflation.
* Technology-related items,
hedonic price adjustments give
these items different trend
inflation rates to the common
underlying trend.
CPI item
04.5.3 Liquid fuels
04.5.2 Gas
09.1.2 Photographic, cinematographic and optical equipment
09.1.3 Data processing equipment
04.5.1 Electricity
07.2.2 Fuels and lubricants
12.5.4 Transport insurance
09.1.1 Reception and reproduction of sound and pictures
07.3.3 Passenger transport by air
04.5.4 Solid fuels

Comparing ‘core’ inflation estimates
%
Trimmed mean and common trend estimates of core inflation
Inflation rates
(July 2023)
Trimmed mean:
7.3%
Persistence:
6.9%

Inflation volatility and
persistence in the CPI
Items that are more likely
to be trimmed also
exhibit lower persistence.
Different sides of the
same ‘core’ inflation coin.
-20
0
20
40
60
80
100
-20 0 20 40 60 80 100
Frequency
of
trimming
ranking
(1-85),
lowest
to
highest
Signal-to-noise ranking (1-85), lowest to highest
Alcohol and tobacco Audio-visual
Energy and fuels Food
Health services Household goods
Housing services Other services
Recreational/personal services Travel services
Vehicles

Summary
• The persistent part of CPI inflation has been slower to reach a
turning point and the fall has been less than for the headline
all-items rate
• Inflation persistence measures consistent with other estimates
of UK core inflation
• graeme.chamberlin@ons.gov.uk
• sumit.dey-chowdhury@ons.gov.uk

Changes in labour costs
and prices
Christina Palmou

How do firms pass-through input costs?
Businesses have many ways to react to higher prices of inputs:
• Reducing profit margins to cover higher costs
• Passing on costs to consumers with higher prices
• Reducing purchases of inputs and reducing output
• Substituting away from more expensive types of inputs
• Increasing productivity

Why are firms raising prices?

What about manufacturing?

How much of their input costs is being passed on?

Has the labour share of turnover increased?

Price hikes and wage pressures – does it stack up?
Labour cost share
of output, 2019
Wage increase,
2019 to June 2023
Theoretical wage shock
under full pass-through
Output price
increase, 2019 to
June 2023
Theoretical proportion of
output price increase due
to wage increase, under
full pass-through
Industrial gases, inorganics and
fertilisers
15% -1% 0% 57% 0%
Other non-metallic mineral
products
25% 14% 4% 46% 8%
Basic metals 21% 12% 3% 43% 6%
Wood, wood products except
furniture
26% 22% 6% 36% 16%
Prepared animal feeds 14% 19% 3% 35% 8%
Grain mill products, starches and
starch products
14% 19% 3% 35% 8%

September 2023
Price hikes and wage pressures – does it stack up?
Labour cost share of
output, 2019
Wage increase,
2019 to June 2023
Theoretical wage shock
under full pass-through
Output price
increase, 2019 to
June 2023
Theoretical proportion of
output price increase due
to wage increase, under
full pass-through
Child day-care and other
social work without
accommodation
62% 25% 15% 14% 111%
Management consultancy 38% 30% 11% 11% 106%
Market research and public
opinion polling
31% 64% 20% 7% 271%
Services to buildings and
landscape
37% 26% 10% 12% 79%

Is there a wage price spiral?

Wage and price increases in the BICS
• Businesses that reported wage increases in the previous month were
59% more likely to report price increases, controlling for other price
pressures
• Business that reported increases in the cost of their inputs were 73%
more likely to report price increases
• Finally, businesses are more likely to increase prices if they are
facing difficulties filling in vacancies or demand increases

How have firms reacted to wage increases?
• In several service industries, labour costs are important so wage rises
could explain most price growth since 2019
• In manufacturing even after large wage increases, industry output price
growth is driven mainly by other factors
• Overall, there is no clear evidence that there has been a change in the
correlation between wage increases and output price increases
• In a whole economy BICS sample, businesses reporting an increase in
wages were 59% more likely to report an increase in output prices, more
so if they are facing increases in demand or tight labour markets.

Closing remarks
Chair – Grant Fitzner
Chief Economist
Director, Macroeconomic and
Environment Statistics and Analysis
@GrantFitzner

Forthcoming ONS economic analysis
19 September 2023 Exploring educational attainment, internal migration, and economic outcomes in English
travel to work areas: 2018 to 2019
19 September 2023 The feasibility of measuring the UK sharing economy: June 2023 progress update
20 September 2023 Prices theme day
25 September 2023 Diversity in the labour market. England and Wales: Census 2021
27 September 2023 Experimental estimates of green jobs
27 September 2023 UK business; activity, size and location: 2023
29 September 2023 GDP theme day
3 October 2023 Impact of reweighting on Labour Force Survey key indicators: 2023
5 October 2023 Skills supply estimates for the UK
10 October 2023 The role of labour costs and profits in UK inflation
11 October 2023 Income estimates for small areas, England and Wales: financial year ending 2020
12 October 2023 Short-term economic indicators theme day
All information on upcoming analysis can be found via the ONS website

Dates for your diary
26 September 2023 Beyond GDP: international developments and emerging frameworks
11 October 2023 GDP after 2025: updating national accounts and balance of payments
12 October 2023 So what does ‘Beyond GDP’ mean for the UK
16 October 2023 ONS Economic Forum
19 October 2023 ESCoE webinar: Studying consumption behaviour using open-ended text
questions
24 October 2023 Urban Natural Accounts seminar
Registration for all the above events will open shortly and further information will be
published at ons.gov.uk/economicevents

Consultation on the future of population and
migration statistics – closes 26 October 2023
On 29 June 2023, we launched a public consultation on our proposals for a transformed
population and migration statistics system. These statistics cover a wide range of areas,
including household characteristics, employment, health, religion and international migration.
We welcome contributions from all users. This includes those who are experienced users of
ONS’s statistics, through to those who are looking to use ONS population and migration data
for the first time. We value everyone’s feedback.
More information on the consultation can be found at consultations.ons.gov.uk/ or you can
contact the ONS for further information about this consultation
at: 2023consultation@ons.gov.uk

Thank you for attending the
Economic Forum
You can keep up to date on all upcoming events via
ons.gov.uk/economicevents
If you would like to ask a question or provide any feedback, please do so
via economic.engagement@ons.gov.uk

SlideShare ONS Economic Forum Slidepack - 18 September 2023

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SlideShare ONS Economic Forum Slidepack - 18 September 2023