Inflation index to stay as ONS decides against radical change to RPI

Office for National Statistics will now publish a new inflation index, RPIJ, rowing back from proposals to alter the index after lobbying from pensioner groups

Treasury ministers have insisted they will continue to link payments on new government bonds to the retail prices index, despite the Office for National Statistics announcing that it now believes the RPI overestimates inflation.

Jill Matheson, the UK’s National Statistician, surprised the City on Thursday when she announced that the ONS had rowed back from a proposal to alter the way the RPI, the time-honoured measure of inflation, is calculated.

But after a review process that has taken two years, the ONS did confirm that while it will still produce the RPI – to which many index-linked bonds, pensions and other long-term contracts are tied – the measure is out of line with international best practice, and doesn’t give a good measure of the increase in the cost of living.

As of March, the ONS will now publish a new inflation index, RPIJ, based on a different way of averaging prices, known as a “Jevons” average, which it believes offers a better measure of the cost of living in the economy.

It rejected the more radical option, of simply changing the way the main RPI index is calculated, after a consultation process revealed that users of statistics were overwhelmingly against the move.

Pensioner groups had lobbied particularly hard against the change, which would have resulted in a systematically lower measure of price rises. Many pensioner benefits are pegged to the RPI.

There was also a risk of high profile legal challenges from aggrieved groups, if the method for calculating the RPI was altered.

Matheson said: “We acknowledge that the RPI in its current form doesn’t meet international standards; however, what we also have to do is to take account of user needs.”

Some commentators said the ONS’s approach would sow confusion. “It seems that now we will have the worst of both worlds – the flawed RPI will continue to be used but its flaws will be highlighted each month by the publication in tandem of a new RPI-J index which makes the methodological changes that had previously been recommended to remove the RPI’s undesirable statistical properties,” said Brian Hilliard, of SocGen, adding, “what a mess!”

The Treasury quickly responded by saying that not only would future payments on so-called index-linked gilts – which protect savers against inflation – continue to be calculated according to the RPI, but new gilts would also still be pegged to the old measure.

The Treasury is keen to maintain bond investors’ confidence, at a time when it is continuing to borrow large amounts to fund the ongoing deficit on the public finances.

However, the economic secretary to the Treasury, Sajid Javid, left open the possibility that the government might choose to use the new, lower, measure, for other purposes.

“The government will consider any implications of the National Statistician’s announcement on its approach to RPI indexation across different policy areas in due course,” he said.

George Osborne has already shifted the uprating of many benefits to the consumer price index, the internationally comparable measure of inflation targeted by the Bank of England, which tends to be up to a percentage point lower than RPI. In his December autumn statement, Osborne went even further, putting a controversial 1% cap on many payments.

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