Lords committee calls for single inflation measure

The government should stop ‘index shopping’ when it calculates inflation, address known errors in the retail prices index (RPI) calculation, and move to a single general measure of inflation in the next five years in order to eliminate unfairness, a House of Lords select committee has advised

The economic affairs committee says 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 way it calculates 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 have received what the committee calls ‘an unwarranted windfall’ of around £1bn more in interest payments every year.

The committee wants the error corrected and also recommends a single measure of general inflation for use by the government. This is to prevent so-called ‘index-shopping’, where indices are chosen because of their impact on the public finances rather than their merits as measures of inflation.

Lord Forsyth of Drumlean, chair 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 (CPI). But when it takes money from people, it is generally opting to use the RPI, which has been around one per cent higher than CPI in recent years. This simply is not fair.’ 

The committee says the main problem with RPI is an unintended consequence of a routine methodological improvement by the UK Statistics Authority. Correcting the error would require the Chancellor's approval because it would cause ‘material detriment’ to index-linked gilt holders.

In evidence, the UK Statistics Authority told the committee they had not asked the Chancellor because they expected he would say no. The Treasury said it could not act, because no such request had been submitted. The committee concluded that such a request should be submitted, and the Chancellor should consent.

Phil Hall, head of public affairs and public policy at the Association of Accounting Technicians (AAT), said: ‘AAT has long argued that a stable, credible, accurate, internationally recognised measure of inflation should take precedence over the current range of measures and is pleased that the House of Lords economic affairs committee appears to have reached the same conclusion.

‘The change will prevent any future government from engaging in index or inflation shopping - picking the measure that best suits the governments purpose i.e. to pay out lower benefits or to increase income e.g. from student loans and rail fare increases.’

Economic Affairs Committee report Measuring Inflation is here

Report by Pat Sweet

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