Office for National Statistics will now publish a new inflation index,
RPIJ, rowing back from proposals to alter the index after lobbying from
pensioner groups
The Office for National Statistics
has bowed to fierce lobbying by pensioner groups and backed away from
radical changes to the way inflation is calculated that could have
depressed retirement payouts.
Jil Matheson, the UK's national statistician, surprised the City on Thursday when she announced that the ONS had rejected a proposal to alter the way the RPI, the time-honoured measure of inflation, is calculated, despite acknowledging that it tends to systematically overestimate inflation.
After a two-year review, the ONS said that while it will still produce the RPI – to which many index-linked bonds, pensions and other long-term contracts are tied – it is constructed in a way that
is out of line with international best practice, and does not give a good measure of the increase in the cost of living.
From March, the ONS will publish a new inflation index, the RPIJ, based on a different way of averaging prices, known as a Jevons average, which it believes is superior to the current method, known as a "Carli average".
Given the questions about how it is calculated, the UK Statistics Authority will also review the RPI and decide whether it should be stripped of its "national statistic" badge.
Asked whether she thought the government should switch to the RPIJ for calculating payments on government bonds, rail fares and the many other decisions currently based on RPI, Matheson said: "It is in the hands of users to decide which index they use".
She rejected the more radical option of changing the way the main RPI index is calculated, overturning the views of the ONS's consumer prices advisory committee, after public consultations revealed that users of statistics were overwhelmingly against the move, with 82% of respondents calling for no change in the methodology. Pensioners' groups had lobbied particularly hard against the change. Many pensioner benefits are pegged to the RPI. There was also a possibility of high-profile legal challenges from aggrieved groups if the method for calculating the RPI had been altered.
Matheson said: "We acknowledge that the RPI in its current form doesn't meet international standards; however, what we also have to do is to take account of user needs."
Joanne Segers, chief executive of the National Association of Pension Funds, said: "Pension funds are relieved that RPI has been left intact because rewiring this crucial measure would have created upheaval for both inflation-linked pension fund investments and the income of current and future pensioners."
Some commentators argued that the ONS's approach would sow confusion, however. "It seems that now we will have the worst of both worlds – the flawed RPI will continue to be used but its flaws will be highlighted each month by the publication in tandem of a new RPIJ index which makes the methodological changes that had previously been recommended to remove the RPI's undesirable statistical properties," said Brian Hilliard, of Société Générale, adding: "What a mess"
The Treasury said that not only would future payments on so-called index-linked gilts – which protect savers against inflation – continue to be calculated according to the RPI, but new gilts would also still be pegged to the old measure. Index-linked gilts rallied on financial markets after the news.
The economic secretary to the Treasury, Sajid Javid, left open the possibility that the government might use the new measure for other purposes. "The government will consider any implications of the national statistician's announcement on its approach to RPI indexation across different policy areas in due course," he said.
George Osborne has already shifted the uprating of many benefits to the consumer price index, the internationally comparable measure of inflation targeted by the Bank of England, which tends to be up to a percentage point lower than RPI. In his December autumn statement, Osborne went even further, putting a controversial 1% cap on many payments.
Jil Matheson, the UK's national statistician, surprised the City on Thursday when she announced that the ONS had rejected a proposal to alter the way the RPI, the time-honoured measure of inflation, is calculated, despite acknowledging that it tends to systematically overestimate inflation.
After a two-year review, the ONS said that while it will still produce the RPI – to which many index-linked bonds, pensions and other long-term contracts are tied – it is constructed in a way that
is out of line with international best practice, and does not give a good measure of the increase in the cost of living.
From March, the ONS will publish a new inflation index, the RPIJ, based on a different way of averaging prices, known as a Jevons average, which it believes is superior to the current method, known as a "Carli average".
Given the questions about how it is calculated, the UK Statistics Authority will also review the RPI and decide whether it should be stripped of its "national statistic" badge.
Asked whether she thought the government should switch to the RPIJ for calculating payments on government bonds, rail fares and the many other decisions currently based on RPI, Matheson said: "It is in the hands of users to decide which index they use".
She rejected the more radical option of changing the way the main RPI index is calculated, overturning the views of the ONS's consumer prices advisory committee, after public consultations revealed that users of statistics were overwhelmingly against the move, with 82% of respondents calling for no change in the methodology. Pensioners' groups had lobbied particularly hard against the change. Many pensioner benefits are pegged to the RPI. There was also a possibility of high-profile legal challenges from aggrieved groups if the method for calculating the RPI had been altered.
Matheson said: "We acknowledge that the RPI in its current form doesn't meet international standards; however, what we also have to do is to take account of user needs."
Joanne Segers, chief executive of the National Association of Pension Funds, said: "Pension funds are relieved that RPI has been left intact because rewiring this crucial measure would have created upheaval for both inflation-linked pension fund investments and the income of current and future pensioners."
Some commentators argued that the ONS's approach would sow confusion, however. "It seems that now we will have the worst of both worlds – the flawed RPI will continue to be used but its flaws will be highlighted each month by the publication in tandem of a new RPIJ index which makes the methodological changes that had previously been recommended to remove the RPI's undesirable statistical properties," said Brian Hilliard, of Société Générale, adding: "What a mess"
The Treasury said that not only would future payments on so-called index-linked gilts – which protect savers against inflation – continue to be calculated according to the RPI, but new gilts would also still be pegged to the old measure. Index-linked gilts rallied on financial markets after the news.
The economic secretary to the Treasury, Sajid Javid, left open the possibility that the government might use the new measure for other purposes. "The government will consider any implications of the national statistician's announcement on its approach to RPI indexation across different policy areas in due course," he said.
George Osborne has already shifted the uprating of many benefits to the consumer price index, the internationally comparable measure of inflation targeted by the Bank of England, which tends to be up to a percentage point lower than RPI. In his December autumn statement, Osborne went even further, putting a controversial 1% cap on many payments.
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