MNI INTERVIEW2: Ex-BOE Bean: Treasury Lead Needed On RPI Shift

--Bean: Ball In Treasury's Court Over Move From RPI

By David Robinson

     LONDON (MNI) - It is up to the UK Treasury to end the impasse over the

shift away from the discredited retail prices index (RPI) and on to a consumer

prices index, Charles Bean, a senior official at the Office for Budget

Responsibility and former Bank Of England (BOE) Deputy Governor told MNI in an

interview. 

     Bean was clear that RPI cannot be reformed and that the Treasury needs to

drive the move away from it.

     "RPI is fundamentally a flawed statistic. It fails one of the most basic

requirements of any sensible price index," Bean said.

     If prices go up and then come back down to where they were originally the

RPI shows a positive inflation rate over the whole of that period, whereas Bean

said "Any price index .. should have the property that there has been no

inflation."

     A recent round of evidence from top statistics, Debt Management Office

(DMO) and Treasury officials to a parliamentary inquiry on the use of RPI

revealed a plethora of views over whether to reform RPI, whether to keep using

it for debt issuance and confusion over who should make the next move.

     --FLAWED FORMULA

     RPI's main problem lies with the mathematical formula used to calculate RPI

and formula change could be costly for the Treasury due to claims from holders

of some RPI linked debt. 

     "If you did that it would constitute a fundamental change in the index. The

RPI, there are always tweaks to it, but there are some gilt issues where if the

RPI is re-defined in a fundamental way then the government has to offer to buy

the stuff back," Bean said.

     It is up to the BOE to determine whether a price index alteration amounts

to a fundamental change and Bean used to chair the relevant committee that would

make that decision.

     The Office for National Statistics (ONS) and the associated statistics

authorities have supported a switch away from RPI to CPIH, a consumer price

measure with a housing element. The recent evidence to the House of Lords

Economic Affairs Committee, however, saw some officials focus on the hurdles to

a switch.

     Robert Stheeman, Chief Executive Officer of the Debt Management Office,

warned that moving inflation linked gilt issuance from RPI to a CPI measure

would come at a cost to the public finances because of market fragmentation.

     "If you had the situation .. where demand for RPI heavily outweighs demand

for CPI, it is very likely that we would achieve a poorer price for CPI-linked

issuance than we would for RPI-linked issuance," Stheeman said.

     Chief Secretary to the Treasury Elizabeth Truss suggested that

statisticians should do more work on improving RPI.

     --TREASURY MUST LEAD

     Bean, however, is crystal clear that is up to the Treasury, as the relevant

government department, to take the lead and that delaying a switch because it

could come at a cost would amount to accepting indefinite delay.

     "I think the ball is very clearly in the government's court here. It is not

up to the ONS. The ONS made very clear their views about the merits and demerits

of the indices," Bean said.

     "I think at some point if you are looking at indexed debt you have to move

over to CPI, or CPIH. You can decide whichever is preferred out of those two and

that might mean some temporary slight increase in the cost of finance," he

added.

     "If you don't make that step you never change .. you always say there is

this near-term cost," Bean said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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