UK Statistics Authority — Written evidence (RPI0026)
I am writing with additional information the Committee requested when we gave evidence on 12 June. These are attached at Annex A.
I would also like to take this opportunity to reaffirm the position of the UK Statistics Authority that the Retail Prices Index (RPI) is not a good measure of inflation1, does not have the potential to become one, and we strongly discourage its use. Its continued publication is a result of the legislation and the way it is built into a range of contracts.
We continue to encourage users to move away from the RPI to better measures, while recognising that there is never likely to be a single measure of inflation that captures all individual experiences of price changes or meets all user needs. The Consumer Price Index including owner-occupiers’ housing costs (CPIH) and the Consumer Price Index (CPI) are both National Statistics, and the Office for National Statistics (ONS) are developing new Household Cost Indices with a particular focus on the experience of different household types. They have set out for users the different characteristics of these different families of indices2.
We welcome the statement by the Chancellor on 25 April that the direction of travel is away from the RPI to the CPIH. The Governor of the Bank of England has also made the case against the use of RPI3.
We have seen the use of RPI decline over time. Nonetheless, like the Committee we see continuing uses of the RPI that are difficult to justify. I have for example said publicly that I am concerned by its use for student loans and rail fares.
As we discussed, the issues around the use of RPI are complex, often reflecting decisions and contracts made many years ago. Changes will need to be carefully planned and coordinated. The UK Statistics Authority and ONS look forward to playing their parts in making the changes that are needed.
Potential consequences of altering the Retail Prices Index (RPI)
Many respondents to the 2012 consultation on the future of the RPI were concerned for various reasons about altering the RPI, and their responses are published in full[1] for the Committee’s information.
The responses outlined that the corporate index-linked bond market is smaller than the index-linked gilts market, but each bond has its own prospectus and changes to the RPI are dealt with in different ways in different prospectuses. Contractual and legal issues could therefore be complex and time-consuming to resolve.
Other feedback suggested that material downwards revisions could trigger redemption, in part since more recent contracts provide for the ‘wedge’ between RPI and Consumer Price Index (CPI). Possible early repayment of bonds may carry a significant risk of market value losses for investors and a re-financing risk for issuers. In addition, companies that market bond debt to investors in line with other RPI linked bonds (that make provisions for a substantial change to the index) could see a significant adverse mismatch with their RPI-linked assets, which offset the debt.
Other responses highlighted that the issue is not restricted to standard corporate debt securities. For example, social housing is funded using RPI-linked investments. This includes funding social and affordable housing as well as investing in local communities, employment, budgeting and other tenant support. Changes to the RPI could therefore affect the funding of these schemes.
Potential impact of limiting the use of RPI.
The RPI is still used across government and industry, and the Office for National Statistics (ONS) has not undertaken detailed analysis of the overall impact on the economy of moving away from RPI. ONS would be happy to receive guidance from the Committee on the value of working with relevant government agencies on an analysis of the possible impact if a change to the RPI measure were to happen in ten years, as suggested by the Governor and noted by the Committee.
The departments and organisations that use the RPI may hold information that could assist in estimating individual costs associated with a change in inflation measure, including:
UK Statistics Authority statement after consultation, 2013
The UK Statistics Authority published a statement[7] on 10 January alongside the outcome of the consultation on the future of RPI. The relevant passage is as follows:
“In recognition of the continuing user need for the existing RPI in its current form, for example in the index-linked gilts market and in the indexation of private pension payments, the National Statistician has also announced that, for the foreseeable future, the production and publication of the RPI will continue.”
ONS has continued to work on developing a wider range of consumer price statistics. This work has been supported by the UK Consumer Price Statistics Review[8] undertaken by Paul Johnson in 2015, and our subsequent public consultation on the future of consumer prices statistics.
In 2017, we reduced the number of RPI-related indices and now only publish those that are essential to meet current user needs. We have agreed a large development programme for consumer price statistics with our Stakeholder Advisory Panel and Technical Advisory Panel. Key projects include investigating the use of alternative sources of price and expenditure data, and developing the Household Cost Indices, which aim to capture households’ experience of changing prices and costs.
As discussed with the Committee, ONS considers RPI to be a legacy measure and publishes it on the basis that we are required to do so under the Statistics and Registration Services Act 2007. We continue to encourage users to use indices which do not suffer the same weaknesses as the RPI, and are encouraged by the Governor’s recent comments to this Committee about a transition away from the measure.
Measures of inflation and their uses
We believe it is unlikely that a single measure of inflation will be appropriate for all uses, and published a note in March 2018 explaining the various measures we publish and their uses[9].
We consider the Consumer Price Index including owner- occupiers’ housing costs (CPIH) to be the most comprehensive measure of price change across the economy as a whole and it has been our headline measure of inflation since March 2017. This followed substantial work to improve the quality assurance of data sources used to construct owner occupier housing costs, as well as extensive consultation with users.
Household Cost Indices currently under development will provide a set of measures that describe the experience of households by measuring changes in costs they face; preliminary estimates were published in December 2017[10].
25 July 2018
[1] Responses to ONS RPI consultation 2012
[2] DMO Index-linked gilts in issue
[4] DWP Defined Benefit Pension White Paper 2018
[5] Pensions Regulator RPI schemes 2017
[6] ORR Rail industry financial information 2016-17
[7] UK Statistics Authority: Statement on RPI, 2013
[8] UK Consumer Price Statistics Review, 2015
[9] ONS Measuring prices and costs for consumers and households, 2018