Source: British Parliament News
17 January 2019
The Economic Affairs Committee publishes its report on ‘Measuring Inflation’. The report considers the future of the retail price index (RPI) and its use by the Government.
The Committee finds that the UK Statistics Authority is at risk of being in breach of its statutory duties on the publication of statistics, by refusing to correct an error that it openly admits exists in the Retail Prices Index (RPI). This error, made in 2010 when the process for collecting price quotes for clothing was altered, has resulted in RPI being 0.3 percentage points higher since 2010. As a result, commuters and students pay more because rail fare increases and student loan interest rates are linked to RPI, and holders of index-linked gilts at the time received an unwarranted windfall. The UK Statistics Authority has a duty to “promote and safeguard the quality of official statistics”.
The Committee calls for the Authority to follow the procedure for correcting the error and, given that RPI remains in widespread use, resume a programme of regular methodological improvements. The Committee also recommends a single measure of general inflation for use by the Government. This is to prevent so-called ‘index-shopping’ by Government, where indices are chosen because of their impact on the public finances rather than their merits as measures of inflation.
Lord Forsyth of Drumlean, Chairman of the Economic Affairs Committee, said:
“When the Government gives money to people it is generally opting to adjust payments for inflation using the Consumer Prices Index. But when it takes money from people, it is generally opting to use the Retail Prices Index, which has been around one per cent higher than CPI in recent years. This simply is not fair. Together with the UK Statistics Authority, it needs to agree upon a single measure of general inflation which is used for uprating purposes. In the interim the Government should desist from ‘index shopping’ by switching to CPI in all areas not governed by private contracts, including index-linked gilts. “The UK Statistics Authority’s refusal to fix the problems it admits RPI has is untenable. By continuing to publish an index which it admits is flawed, it is arguably in breach of its statutory duty to promote and safeguard official statistics. It should seek to resolve the problems with the index, consulting the Bank of England and the Chancellor of the Exchequer where necessary, and stop treating it as a ‘legacy measure’ when it remains in widespread use. “This is not just a technical debate. The Authority’s error created winners and losers. For example, commuters and students pay more because rail fare increases and student loan interest rates are linked to RPI.”
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.
Correcting the error would require the Chancellor’s approval because it would cause “material detriment” to index-linked gilt holders. When asked, the UK Statistics Authority told us they had not asked the Chancellor because they expected he would say no. The Treasury said they could not act, because no such request had been submitted. The Committee concludes that such a request should be submitted, and the Chancellor should consent.
The gap between RPI and CPI has encouraged governments to ‘index shop’: benefits, tax thresholds and public sector and state pensions were all switched from being uprated by the higher RPI to the lower CPI in 2011.
To have credibility, a single general measure of inflation requires a satisfactory measure of owner-occupier housing costs. At present, there are critics of how the RPI and the Consumer Prices Index including owner-occupiers’ housing costs (CPIH) do this. The UK Statistics Authority should agree on a best measure of owner-occupier housing costs to be used in the new single general measure.
The Committee is unconvinced that the UK Statistics Authority should consider the interests of those materially affected by changes to statistical measures in making decisions about adjustments or corrections. UKSA has a statutory duty to promote and safeguard the quality of official statistics, which it may have neglected in the case of RPI.