Chair of Lords Economic Affairs Committee responds to the UK Statistics Authority and HM Treasury's joint consultation on reforming RPI

Wednesday, 25 November 2020 16:02

Responding to the UK Statistics Authority and HM Treasury's joint consultation on reforming RPI, Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee, said: “The proposal to replace RPI with the CPIH inflation measure in this way is wrong. Our Committee’s Measuring Inflation report called on the UK Statistics Authority to correct an error that it openly admits exists in the RPI, something it has refused to do. Our report also recommended that...Request free trial

Responding to the UK Statistics Authority and HM Treasury's joint consultation on reforming RPI, Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Committee, said:

“The proposal to replace RPI with the CPIH inflation measure in this way is wrong. Our Committee’s Measuring Inflation report called on the UK Statistics Authority to correct an error that it openly admits exists in the RPI, something it has refused to do. Our report also recommended that the Government adopt a single measure of general inflation.”

Background

The UK Statistics Authority and HM Treasury have responded to the joint consultation on reforming the Retail Price Index (RPI) by bringing the methods and data sources of the Consumer Price Index, including owner occupier housing costs (CPIH) into it. However, to minimise the impact on the holders of index-linked gilts, the Chancellor is unable to offer his consent to the implementation of the proposal before the maturity of the final specific index-linked gilt in 2030.
The House of Lords Economic Affairs Committee published its report, Measuring Inflation, in January 2019. Its two main conclusions were:
- The UK Statistics Authority is at risk of being in breach of its statutory duties on the publication of statistics. It is refusing to correct an error that it openly admits exists in the Retail Prices Index (RPI). It should follow the procedure for correcting the error and, given that the index remains in widespread use, it should resume a programme of regular methodological improvements.
- A single measure of general inflation should be agreed for use by the Government. This is to prevent so-called ‘index-shopping' by Government.
Other findings and recommendations set out in the report include:
- The main problem with RPI is an unintended consequence of a routine methodological improvement by the UK Statistics Authority to the collection of price quotes for clothing. This has widened the difference (the ‘formula effect') in the annual rate of change in RPI compared to the Consumer Prices Index (CPI). As a result of the clothing change, the ‘formula effect' has increased from 0.5 per cent to 0.8 per cent.
- The Authority's error has created winners, such as holders of RPI-linked Government bonds, who have received around £1 billion more in interest payments every year, and losers, such as commuters and students with annual rail fare increases and the interest rate on student loans linked to RPI.