UBS: Seasonal PI

Is there anything we can say about the actual price of Christmas? The underlying data suggests that Christmas is getting cheaper. Yes people are spending more and more of their monthly income on Christmas. There has been a clear trend higher, despite the average cost having fallen. What is driving these trends?

In the past we have created a proxy price index for the presents listed in the Twelve Days of Christmas song (see for example Economist Insights of 24 Dec 2012, 23 Dec 2013 and 19 Dec 2014). Of course, these partridges and pear trees are looking a bit dated, and the inflation tends to be dominated by the price of those five golden rings. Is there anything we can say about the actual price of Christmas? Well there may be, at least in the UK.

First we need to figure out what constitutes Christmas spending. Spending patterns tend to fluctuate through the year, and spending in Western economies tends to be very high in December but very low in January. This pattern is known as seasonality, and makes it difficult to look at the month-on-month changes. If you looked at UK retail sales in December you would see a booming economy, and if you looked at retail sales in January you would see a recession. So statisticians strip out these effects using seasonal adjustment. They throw away this seasonal element and are left with the underlying average (effectively redistributing through the year) (chart 1).

But maybe we can do something with that seasonal part that the statisticians throw away. If the seasonally-adjusted part is the underlying spending for December, then the non-adjusted part they removed must be the extra spending for the Christmas season. If we can see how much the price of that extra spending has changed, we can get a good idea of how much the price of Christmas has changed.This seasonal element is not total retail spending, just the additional component that comes from Christmas. The seasonally adjusted part of the spending is deemed as spending that would have happened anyway: people would still need to buy groceries if it wasn't Christmas. However, at Christmas they spend more. So,for example, last Christmas the underlying seasonally-adjusted real retail sales were GBP 28 billion, with an extra GBP 8 billion of seasonal spend.

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