Inflation changes: a classic British fudge | Analysis

Ministers – and the ONS – know better than to take on pensioners over RPI, says Larry Elliott

Once the Office for National Statistics said it wanted to have a long hard look at the retail prices index to see if it was fit for purpose there were really only three possible options.

The first was to say that there was no problem and that therefore the status quo should apply. The second was to say that there was a problem and that the RPI should be replaced by something more robust.

The third was the British way: admit that the RPI is frankly useless but continue using it anyway. No prizes for guessing which option the ONS and the Treasury have come up with.

In a sense, the fudge is not just explicable but sensible. Had the ONS cited methodological problems as the reason for changing the way the RPI was calculated (as it could have done) , pensioners would have kicked up an almighty fuss. Why? Because inflation as measured by the RPI has been consistently higher than inflation measured by the consumer prices index (by around a percentage point) and using the CPI as a yardstick for calculating interest rates on government bonds would have meant smaller pensions.

Far better from the ONS’s perspective to say it is happy enough to continue calculating the RPI on the old basis, despite its acknowledged flaws – and allow George Osborne to decide whether to continue using it. The Treasury has decided it will, even though analysts at Capital Economics have calculated that it will cost the Treasury £7bn in higher interest payments by 2016-17.

For a government counting every penny, this is a considerable financial loss. On the other hand, pensioners vote in their millions and with an election little more than two years away, ministers – and the ONS – were clearly not keen to fight a prolonged and bitter political battle with one of the country’s most powerful lobbying groups. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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