UK lawmakers demand end to inflation index ‘merry-go-round’

The UK Statistics Authority has been urged by lawmakers to seek consent from the country’s chancellor to amend the retail price index (RPI).

In a joint letter, sent by the Treasury Select Committee (TSC) and the House of Lords Economic Affairs Committee, the UKSA was urged to write to Philip Hammond “for such a change as soon as possible”.

“The Authority told us they had not asked the chancellor to approve fixes to RPI because they expected he would say no,” Michael Forsyth, chair of the Lords committee, said today (February 12).

“The Treasury said they could not act because no request had been submitted. This is a ridiculous merry-go-round,” he added.

The letter, written by Forsyth and TSC chair Nicky Morgan, is the latest move from lawmakers, following a critical report published by the Lords committee earlier this year, which highlighted a major error in the calculation of the RPI.

This error, Morgan and Forsyth write, has led to a £1 billion ($1.29 billion) yearly windfall for index-linked gilt-holders at the expense of consumers.

Unlike in 2010, when the measure could be changed without government approval, the UKSA must now seek consent from Hammond, thanks to the Statistics and Registration Service Act.

According to the legislation, a proposed change to the RPI, which will cause a “material detriment” to index-linked gilt-holders, requires the approval of the chancellor.

This principle surely undermines the integrity of UK statistics and opens it [up] to abuse in other areas

Letter by Michael Forsyth and Nicky Morgan

At a hearing after the release of the January report, members of the UKSA said correcting the inflation measure would have a negative impact on some members of society and therefore “there was no point requesting to correct the clothing change because the chancellor will say no”.

“This principle surely undermines the integrity of UK statistics and opens it [up] to abuse in other areas,” today’s letter states. “There are also many affected negatively by the status quo… who have clearly not been taken into account to the same degree.”

Students and rail passengers are among those who have been affected seriously by the error, given that student loans and rail-fare increases are pegged to the RPI, which is normally higher than the consumer price index.

Instead of fixing the error, the UKSA has designated RPI a “legacy measure” and urged the government not to use it.

“This is not a tenable position when the index remains in widespread use,” Morgan and Forsyth write.

History of problems

There has been significant debate among statisticians over which is the best measure of inflation, with the RPI criticised heavily in most instances.

The TSC has urged the government to abandon the use of the RPI, as has the UKSA on numerous occasions; the result being the RPI lost its status as a national statistic in 2013, but the government continues to use the measure.

“It appears grossly unfair that government formulae affecting people’s incomes, such as pensions and benefits, often use CPI, whereas formulae affecting outgoings, including student loans, often use RPI, which typically gives a higher rate of inflation,” Morgan said in a statement accompanying the letter.

Given that previous cries from lawmakers have fallen on deaf ears, Morgan now believes Hammond should “at least” consent to the UKSA correcting the known errors in the RPI formula.

“We expect the chancellor to give his consent and will follow up accordingly,” the letter says.