MNI POLICY: UK Hammond Backs Gradual Move Away From RPI

By David Robinson

     LONDON (MNI) - The UK Treasury wants to phase out usage of the retail

prices index (RPI), the legacy inflation measure, but has not set a target date

for ending linking any public sector business to it, Chancellor of the Exchequer

Philip Hammond told legislators Tuesday.

     "The government's clear intention is to move away (from RPI) over time,"

Hammond told the Lords Economic Affairs Committee.

     RPI is the reference point for UK inflation-linked gilts, rail fare changes

and student loan rates. The index is statistically flawed but Hammond favours a

policy of gradually reducing usage, including slowing the issuance of RPI linked

gilts, rather than axing it.

     --LINKER ISSUANCE

     Hammond noted that there was strong demand for RPI-linked gilts, in part

because some pensions have RPI-linked benefits, but even here he was seeking to

slow the rise in RPI-linker issuance.

     "In the current year we have directed the DMO (Debt Management Office) to

slightly ease up on the trend towards more RPI linked (gilts)," he said.

     Hammond could switch the Bank of England Monetary Policy Committee's

inflation target from CPI to CPIH, which includes housing costs and is the

Office for National Statistics' preferred measure, but once again he appeared in

no rush to do so.

     "CPIH only recently, last year, became a national statistic again and the

government believes we should allow time for CPIH to bed in and become

accepted," he said.

     --NO DEFENCE

     Hammond made no attempt to defend RPI as an accurate inflation measure,

saying its shortcoming are "well known and acknowledged."

     These shortcomings include an overestimation of clothing price increases,

with its formula based on a mean calculation which is unduly influenced by

outliers.

     He stressed that it had been up to the ONS to decide whether it could

change the RPI formula without creating a new statistic, and it had decided it

could not.

     --INDEX SHOPPING

     Hammond denied charges that the government has been picking and choosing

between RPI and CPI, the consumer price measure, to maximize its revenue and cut

costs with the former typically running higher than the latter. 

     "I have to take issue with you that the government is guilty of 'index

shopping'," he told one questioner.

     He noted that business rate had been moved to CPI and while rail-fares were

still RPI linked, the minister for transport "has been explicit that he would

like to move away from RPI but would only be able to do so if the cost drivers

in the industry are also moved away from RPI."

     Rail workers' pay increases, for example, are linked to RPI, and the unions

are defending this practice.

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

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

[TOPICS: M$B$$$,M$E$$$,M$$BE$,MFB$$$,MGB$$$]