Experimental UK Regional Consumer Price Inflation with Model-Based Expenditure Weights

Abstract

Like many other countries, the United Kingdom (UK) produces a national consumer price index (CPI) to measure inflation. Presently, CPI measures are not produced for regions within the UK. It is believed that, using only available data sources, a regional CPI would not be precise or reliable enough as an official statistic, primarily because the regional partitioning of the data makes sample sizes too small. We investigate this claim by producing experimental regional CPIs using publicly available price data, and deriving expenditure weights from the Living Costs and Food survey. We detail the methods and challenges of developing a regional CPI and evaluate its reliability. We then assess whether model-based methods such as smoothing and small area estimation significantly improve the measures. We find that a regional CPI can be produced with available data sources, however it appears to be excessively volatile over time, mainly due to the weights. Smoothing and small area estimation improve the reliability of the regional CPI series to some extent but they remain too volatile for regional policy use. This research provides a valuable framework for the development of a more viable regional CPI measure for the UK in the future.