The retail prices index (RPI) should be reformed within the next decade but the full ramifications must be properly considered, according to the UK's statistics chief.
On 17 July, the House of Lords' Economic Affairs Committee questioned the Statistics Authority chief executive John Pullinger over the Office for National Statistics' (ONS) use of RPI and whether he would seek to replace the inflation measure which Lord Tugendhat called the "faulty compass".
"I would really hope this is not a never situation, I think this is not an ‘if' but ‘when'. I would hope this is resolved much more quickly than [in 10 years]," said Pullinger.
He went on to say reform could be "as soon as you like", as long as it does not destabilise the market, and that "others are better placed to judge that than me."
Pullinger agreed that while the consumer price index (CPI) is one solution, he was reluctant to put forward a proposal unless it was "absolutely clear how it will fit together", as there is a real risk of "upsetting a very careful set of expectations that are themselves baked into the RPI as it's currently calculated".
"I want to create a set of prices to help you understand the prices as they go in the economy and a set of prices as they impact on households. I have RPI, which were I to change would affect in some windfall way one group of people in one direction, and one group of people in another.
"This is an uncomfortable space," he continued. "Until there is a way of moving off it, not just in the world of statistics, but [also] in the real world in terms of the gilts markets and the bonds market and various other markets that prices in RPI as it is now - the only place I can start is here."
The Economic Affairs Committee continued to grill Pullinger over why, if necessary and backed by sound statistical principles, reform is taking so long.
Lord Forsyth of Drumlean pointed out that Pullinger was under a legal duty to safeguard and promote official statistics, and whether it would be possible to adhere to that duty unless the change from RPI to CPI were made. He asked how many billions were given to index-linked bondholders after a change to the way clothing prices were collected in 2010, which increased the upward bias of RPI.
Pullinger paused, then said he was in no position to guess the impact of the higher inflation measure, that is what was being reflected in the gilt market, and then said "it is what it is".
He did, however, agree with the committee that RPI is not a good measure of inflation as captured in relation to the impact of prices on the consumption of goods and services, or the impact of prices on households, but said two perfectly good measures that capture this instead of RPI already exist.
He also agreed the argument should be made on the statistical merits of the measure, and said he is working closely with the Treasury and the Bank of England to make that happen.
"What is it that people need to measure? Some people want to measure macro-economic concept of prices, and some wanted to measure the impact on household prices. What we've sought to do is come up with a set of statistics that measure both of those things. And we have those."
"We have taken a huge amount of work on ‘what is the best way to measure inflation'. But we've come up with two separate answers," continued Pullinger. "If I were to make a change I would want to deal with all of the things that I think need to be changed. That would be to either change RPI into CPI, or into the [ONS's] household cost index."
Lord Forsyth of Drumlean added: "I thought you guys were there with a clear duty to produce a statistic which was reliable, not to say ‘can we just wait to make sure that this party or that party is not going to be adversely affected by the change'."
Pullinger's predecessor Jil Matheson said in 2013 that RPI did meet international standards and a new inflation measure should be produced. The government moved public sector pensions from RPI to CPI several years ago but RPI continues to underpin many things such as student loans and gilts.
Most defined benefit (DB) pension schemes have RPI hard-wired into the scheme rules, and there have been calls from some in the pensions industry to allow schemes to move to CPI.
The use of RPI to underpin benefit increases in DB schemes has been tested in recent court cases brought by sponsoring employer.
Earlier this year, BT lost a case in the High Court on whether there was the ability in the rules of this section of the BT scheme to move from RPI to CPI for benefit increases, due to RPI having become "inappropriate".
Meanwhile, the Supreme Court is yet to hand down its final judgment on whether Barnardo' should be able to switch its scheme from RPI to CPI.
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