MNI INTERVIEW: UK's RPI Replacement Should Not Be Set In Stone

With the UK government set to soon reveal plans for moving away from the flawed Retail Price Index used for inflation-linked gilts, the country's deputy national statistician and a former senior Bank of England official told MNI that Chancellor of the Exchequer Rishi Sunak should avoid repeating the mistake made with RPI of enshrining any single inflation series in law and so making it difficult to modify.

It is unclear which series will succeed RPI as the gauge for linkers when Sunak makes his announcement, perhaps in an autumn budget. But the Office for National Statistics produces the CPI measure of consumer price inflation, as well as CPIH, which captures housing costs, and which both Deputy National Statistician Jonathan Athow and former Bank of England Monetary Policy Committee member Martin Weale, an ONS adviser, thought might offer advantages. The ONS also produces experimental inflation series.

Rather than embed a single statistic in prescriptive legislation, Athow said it would be better to ensure a robust framework for all the UK inflation data series, which makes clear precisely what they measure and how.

"You'll want people to have faith in your numbers … if you are an investor looking at the UK and UK gilts that same argument plays for the public finances. You want rigorous public finance statistics to allow you to do a risk-based assessment of whether to buy into UK gilts," Athow said in a joint video interview with Weale following the annual conference of the Economic Statistics Centre Of Excellence.

RPI, widely acknowledged to present a distorted picture of UK prices, has consistently shown a higher inflation rate than CPI, but legislation makes it difficult to introduce any changes which might prejudice existing holders of inflation-linked gilts.

"We are free to increase it (RPI), free to increase the wedge (with CPI) or the rate of RPI but not the other way," Athow said. "From a statistical point of view it is very odd to have that sort of implicit bias built into legislation."

Athow leans towards CPIH as a replacement, noting that public perceptions of price increases were closely linked to housing costs. Many of the other alternatives to RPI were experimental series, which the government would be unlikely to adopt as the index for linkers, Weale noted.

INDEX SHOPPING

A danger in producing multiple inflation series is that they make it easier for governments to pick data sets showing higher inflation for things which are charged for, such as train fares, while other series reporting lower rates of price increases can be deployed for costs, such as public sector wage increases.

"The more varieties you have available the greater the risk of index shopping unless they are presented very clearly," Weale said. "If we think of the CPI/RPI issue that occupied ... 10 years of my life, and that is close to resolution now, that does demonstrate the problem of having multiple horses running at the same time unless you explain very clearly what each of them does."

Both Weale and Athow agreed that CPIH might also be an appropriate series to replace CPI as the basis for the Bank of England's target, as favoured by former governor Mark Carney, even if not immediately.

"CPIH had some problems over statistical accuracy and I could imagine now, perhaps, chancellors have bigger worries but … following the past experience letting it settle down for some time would seem to make obvious sense before making the change," Weale said.