The Lords have spoken: It’s time to fix RPI and reform the way we measure inflation

Hetan Shah
Sterling Rates To Fluctuate During Brexit Negotiations
Reliable official statistics are now more important than ever (Source: Getty)

On Thursday, the House of Lords Economic Affairs Committee published an unusually strongly worded report about what seems like a relatively dry and technical topic: how we measure inflation.

Let me stop you before you switch off – the calculation of inflation matters, because it affects all sorts of prices that you pay, from rail fares to student loans to your mobile phone contract.

So having accurate measures of inflation is important for everyone, not just for statistical geeks like me.

The Lords’ report takes the UK Statistics Authority (Uksa) to task for failing to maintain the Retail Prices Index (RPI) as a good measure. This has led to the index consistently overstating inflation, particularly in clothing.

Uksa had argued that RPI was RIP, and that it should not be used as a metric. But the RPI measure is embedded in many contracts, especially government bonds, so this is not realistic.

The Lords note that, as a result of the poor quality of the statistic, those who hold RPI-linked government bonds got an undeserved windfall from the taxpayer – perhaps of £1bn a year.

Meanwhile, others, such as students and commuters, have lost out, as loan interest and train fare increases are linked to RPI.

Lord Forsyth, chair of the Economics Affairs Committee, said: “The UK Statistics Authority’s refusal to fix the problems it admits RPI has is untenable. By continuing to publish an index which it admits is flawed, it is arguably in breach of its statutory duty to promote and safeguard official statistics.”

Strong stuff – and it’s hard to see how Uksa can now avoid biting the bullet and fixing RPI.

The Committee also took a swipe at the way that the government cherry-picks between inflation measures – often using the lower Consumer Prices Index (CPI) as the metric when it has to pay out, and RPI (which is usually significantly higher) for when it is taking money from people.

This is a problem which I’ve highlighted in these pages before, and it’s good to see the Lords raise it.

The Lords’ instincts are basically along the right lines, except in one area. In their quest to end inflation cherry-picking, they recommend that we move to a single measure of inflation for government.

I can understand their motivation, but statisticians will tell you that different measures are useful for different things.

CPI is particularly good for macroeconomic decision-making, like setting interest rates. But there’s also a need for a “cost of living” type measure – such as the Office for National Statistics’ Household Cost Indices.

It is true that multiple indices make it more tempting for the government to switch in an underhand way, but we should compel politicians to justify their decisions, and shout loudly if they are being sneaky.

We should welcome the ermine-clad Lords’ report. Bad quality or poor use of statistics lead to unfair outcomes and damage trust in government. In an era of “fake news”, reliable official statistics are more important than ever to hold the government to account.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.