RPI review recommends new inflation index

Office of National Statistics says inflation measure is inadequate but should be accompanied by new index rather than revamped

The chancellor, George Osborne, has yet to detail his public spending cuts but 1,700 jobs in defence and social housing have already been lost. Photograph: Dominic Lipinski/PA

Press Association

The Office for National Statistics has issued a surprise decision to keep key inflation measure the RPI intact while recommending that a new index meeting international standards be published in parallel.
Experts had warned that expected changes to the way RPI is calculated would have amounted to "stealth attack" on pensioners. Any move to change RPI calculations would have had far-reaching implications, with RPI linked to a wide variety of services and investments, from water bills and rail fares to pensions and even national debt.
The Office for National Statistics (ONS) consultation was prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI). The ONS research programme found that the RPI formula causes the gap and a new RPI-based index should be published from March 2013 using a new formulation known as RPIJ.
The ONS said the existing RPI series should continue without major change to be used for long-term indexation and index-linked gilts and bonds.
"Therefore, while the arithmetic formulation [of the RPI] would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged," the ONS said.
Before the results were announced there had been concerns for pensioners as many annuities are linked to RPI and even a small percentage change could knock thousands of pounds off a typical 20-year retirement income.
Expected changes also would have given a boost to the chancellor, George Osborne, and his debt-busting plans, saving the Treasury billions of pounds a year in interest on government bonds.

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Some final salary pension payments are linked to RPI, while more than 900,000 investors have National Savings & Investments index-linked savings certificates.
But a reduction in the rate of RPI would have been good news for some. Commuters would benefit, as train fare increases are based on RPI, and student loan repayments are also set using the index.
Some regulated utilities are also based on RPI, such as water bills, and changes may have helped limit annual increases for households, while duty rates on alcohol, tobacco, gambling and fuel are also linked to the inflation measure.
The National Statistician also recommended improvements to the measurement of private housing rents from using an alternative data source should be implemented in the February 2013 RPI indices (published on 19 March 2013). As this change affected the RPI it was subject to consultation with the Bank of England and, if necessary, the consent of the Chancellor of the Exchequer, the