On Household Costs Indices

This paper explores how far it is possible to provide a theoretical framework for the Household Costs Indices. Four features are identified which distinguish the index from conventional consumer price indices: i) the index is calculated giving equal weight to each household's expenditure pattern (democratic weights); ii) insurance premia are treated gross rather net of claims; iii) interest payments are included as a cost and iv) goods and services are accounted for when they are paid for rather than when they are consumed. Points i) and ii) are strongly supported. It is suggested that for theoretical coherence iii) needs to be expanded to include interest receipts as well as payments. Point iv) raises a number of questions. A coherent framework representing the life-time cost of consumption correctly would need to include payments made ahead of future consumption (saving) as well as payments made ex post (repayment of debt). At present the only expenditure item subject to the principles of iv) is higher education; the student loan scheme has many of the characteristics of a tax and the treatment in the household cost indices can be defended on those grounds. ONS intends to produce a variant of the index which reflects the capital costs of housing and some thoughts are offered on measurement of these.