The government and the private sector make wide use of measures
of inflation. The government uses measures of inflation to uprate
some taxes and benefits; to determine changes in rail fares,
reflecting industry costs; to uprate the rate of interest on student loans; when
setting the inflation target for the Bank of England; and
as the reference rate for
government bonds linked to inflation. In the private sector,
inflation is used in some wage agreements; to uprate certain
pension payments, particularly defined benefit pensions; and in
financial markets. However, there is not a single measure of
inflation and the quality of different measures
varies.
The ONS,
regulated by the UK Statistics Authority (UKSA), produces a range of
inflation statistics. The most widely used are CPI and the Retail Prices
Index (RPI). Despite
measuring the same concept, they use different methodologies and
produce different estimates of the rate of inflation. In 2013, as
a result of flaws in the way it is measured, RPI lost its status as a
National Statistic.(a) In 2015, the Johnson Review recommended
that government and regulators should work towards ending the use
of RPI as soon
as practicable.(b)
Since 2010, the government has been reducing its use
of RPI. The
indexation of direct taxes, benefits, public sector pensions and
the State Pension have all moved from RPIto CPI. More recently, the government
changed the indexation of business rates to CPIfrom April 2018,
and NS&I has
announced it will change the indexation of maturing Index-linked
Savings Certificates to CPI from May 2019.
Given the extensive use of RPI across the public and
private sectors, moves away from RPI are complex and potentially
costly. For instance, switching the remaining uses
of RPI to CPI for indirect taxes would
come with substantial costs for the Exchequer. At the same time,
the prices statistics landscape has evolved. Therefore, it has at
times been unclear which measure of inflation it would be
appropriate to use. In 2013, the ONS started
publishing CPIH.
After extensive statistical development, CPIH became
the ONS’s main measure of
inflation in March 2017 and gained National Statistic status from
the UKSA in July that year.(c)
The government’s objective is that CPIH will
become its headline measure over time and that it will reduce the
use of RPI when and where
practicable. CPIH is
conceptually the best measure of inflation, but is relatively new
and work is ongoing to understand its properties compared
to CPI and RPI. As previously stated, while all
index-linked debt is currently indexed to RPI, the government keeps issuance
of potential new debt instruments under review.(d) Further moves
away from RPI are complex and more work
is required to understand the costs and benefits of any changes,
including through consultation with stakeholders. Any changes
will require an orderly transition, likely over an extended
period of time. Until then, the government will not introduce new
uses of RPI.
a ‘Assessment of the Compliance with the Code of Practice for
Official Statistics’, UKSA, 2013.
b ‘UK Consumer Price Statistics: A Review’, Paul
Johnson, UKSA,
2015.
c ‘Letter from Ed Humpherson, Director General for
Regulation, UKSA, to John Pullinger,
National Statistician’, UKSA, 2017.
d ‘Managing fiscal risks: government response to the 2017 Fiscal
risks report’, HM Treasury, 2018.
