An influential economist has told the government it should scrap the measures of inflation that it currently uses to influence public sector pay rises, train fares, and even government bonds.
The consumer price index (CPI) should be replaced as the headline measure of inflation by a new one called CPIH, which includes owner-occupied housing costs, the Institute for Fiscal Studies’ director Paul Johnson said.
Johnson also said the retail price index (RPI) measure was flawed.
Certain complications could arise from any change as the UK government still issues some debt linked to RPI – index-linked gilts or “linkers”. Johnson said that current contracts should stay the same, yet his report recommended a change from hereon and found that the state lost £2bn a year from paying more interest than would be the case with an improved measure.
“They [the Office for National Statistics] should make it clear that the RPI is not fit for purpose and should not be used except where existing legal contracts – for example index-linked gilts – demand it,” Johnson said.
A spokesperson for Unite told City A.M. yesterday that the union had concerns over the fairness of the recommendation because RPI includes rental prices.
“RPI better reflects where many people’s finances are. If you’re going to calculate people’s wages on the basis of CPIH, you’re going to be excluding a big proportion of the population,” he said.