MNI EXCLUSIVE: UK's RPI To Lag Rival Gauges In 10-Yr Reprieve

The benchmark for UK inflation-linked government bonds will fail to keep pace with new data collection techniques used for other price gauges before it is phased out in 2030, senior officials at the Office for National Statistics told MNI, with one adding that changes to the Bank of England's inflation target may also now be delayed.

The Retail Price Index may become more challenging to collect and less representative, said Deputy National Statistician Jonathan Athow, noting that the decision to keep it alive for another 10 years, announced by Chancellor of the Exchequer Rishi Sunak last week, was "not our desired outcome."

"One can either be pleased that after 10 years of statistical awareness of the problems of RPI finally we do have an end in sight. On the other hand the fact that the end is 10 years away raises a number of questions," Martin Weale, an adviser to the ONS and a former Bank of England Monetary Policy Committee member, said in a separate interview.

"There is a question of how RPI can be maintained in the meantime. It is likely to become more obsolete because it is not going to reflect things like scanner data, the new data that are going to become available as a result of modern technology," he said.

GILT OPPOSITION

Methodological flaws in RPI were highlighted in 2010 when a change in clothing prices collection widened the difference between the gauge and more favoured measures of inflation. But index-linked gilt holders have opposed any overhaul of the measure, which has consistently run 0.7-0.8 percentage points above CPI and CPIH.

This RPI/CPI wedge could now move in unpredictable ways, Weale said.

"You might say if it becomes more obsolete the wedge is likely to go up but … there might be some innovations that could be made that now won't be made that could have the effect of pushing the wedge up rather than down … Assuming its current value continues is probably the best forecast that can be produced but it is not going to be a very good forecast," Weale said.

Sunak's decision could mean that switching the BOE's inflation target from CPI to CPIH, which incorporates housing costs, may also be delayed until 2030.

"It is perfectly possible that the changed treatment of RPI, the switch to using the CPIH methodology, will also be an appropriate occasion for changing the inflation target," Weale said,

While RPI ossifies, the ONS is continuing to develop other indices to better reflect experienced inflation, including quarterly household cost indices. These use so-called democratic rather than plutocratic price weights, calculating baskets using average household expenditure patterns rather than shares of total expenditure, a "highly desirable" development, according to Weale.