On the go: The government is still considering whether to take action on problems with the retail price index, it was announced after the Spring Statement yesterday.
With Brexit taking centre stage, chancellor Philip Hammond's spring update was a damp squib on policy, but a written ministerial statement did flag possible reforms to the RPI.
It follows the House of Lords Economic Affairs Committee report on January 17 on measuring inflation, which highlighted a problem with the index.
The government stated yesterday that it is "considering the report, and the complex issues it raises", and is discussing the relevant issues with the UK Statistics Authority. HM Treasury will respond to the committee's report in April.
The House of Lords report pointed out: “The UK Statistics Authority has admitted that there is a problem with the RPI. The problem is an unintended consequence of a routine methodological improvement to the collection of price quotes for clothing. It has caused the ‘formula effect’ – the difference in the annual rate of change in the RPI compared to the CPI due to the way in which price averages are calculated – to widen: the gap was around 0.5 percentage points before 2010, the year the change was made, and it has been around 0.8 percentage points since."
The House of Lords recommended: “Given RPI remains in widespread use, the Authority should stop treating RPI as a legacy measure and resume a programme of periodic methodological improvements.”
The report stated: “To prevent index shopping in the interim, the Government should switch to CPI from RPI in all areas of present use that are not governed by private contracts. This includes issuing new gilts that are linked to CPI rather than RPI. Once the single general measure has been agreed, the Government should begin to issue gilts linked to that index. The UK Statistics Authority and the Government should then decide whether to continue to publish the RPI as a separate index for legacy measures, or whether it should set out a programme of adjustments so that RPI converges on the single general measure in the long-term.”
Until the outcome of the Select Committee’s recommendation is known, volatility in real gilt yields is likely to remain, with implications for UK pension scheme deficits.
