More musings on that "inflation error"

We can track back the origins of this story to page 39 of the Bank of England's February Inflation Report:

Clothing and footwear prices are highly seasonal, falling during sales periods as retailers try to clear that season’s stock and then recovering as new stock is brought in. Due to such changes in stock, identical garments are often no longer available, making it difficult to capture post-sale increases in prices.

It is likely that the previous collection practices picked up the seasonal falls in prices during the winter and summer sales, but did not fully capture the recovery in prices after sales had finished; with CPI calculated from monthly changes in prices, this would have biased down both the price levels and annual inflation rates.

That just does not ring true, and having thought about this, it strikes me that the original inflation figures were in fact correct and the BoE is now frantically trying to shove the blame for the house price bubble onto the ONS.*

Let's first write down what we do know:
i. Clothing/footwear makes up about 6% of the CPI shopping basket;
ii. Clothing/footwear prices had been falling for years;
iii. Retailers practice 'price skimming', in other words, they launch their range at full price (FP) and then the price drops and drops as it goes out of fashion and then what's left is unceremoniously dumped in end-of-season sales (EOSS).
iv. Let's assume for the sake of this discussion that half of items are sold for FP and half in EOSS.

To make the BoE's preposterous claim stack up we have to make two completely unrealistic assumptions:
a) The EOSS discount to full price back in 1997 was only 10%
b) The EOSS discount would have to have increased by 10% of FP every year, in other words, by 2006, the EOSS price would be £nil and by 2009, shops would be paying people £1.80 to take away an item with an original FP of £6.

Here's a table to illustrate the point, click to enlarge:* There has been a long-running feud between the Whitehall/government people and the ONS, and I'd trust the ONS every time. Click the ONS label for some examples (I'm sure there are dozens more).