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Retail Prices Index

Volume 740: debated on Wednesday 14 November 2012


Asked By

To ask Her Majesty’s Government why the Office for National Statistics is reviewing the methodology of calculating changes in prices for the purposes of the retail prices index.

My Lords, the decision to launch a consultation on options, which include amending the way that the RPI is calculated, was taken by the National Statistician after taking evidence on statistical best practice and discussion with the Consumer Prices Advisory Committee, which suggested that the use of one particular formula in the RPI should be reconsidered.

Will my noble friend recognise that the RPI has been with us for 56 years and that millions of investors in gilt-edged securities, index-linked National Savings certificates, pensions and businesses have done their forward planning for years ahead on the basis that RPI will be there? Then along comes the ONS’s quiet-as-a-mouse consultation, rather like the cheque consultation that we managed to expose, and the only beneficiary seems to be the Chancellor. In relation to this long-term planning and the disadvantage that it will impose on millions of people, will my noble friend tell the ONS to put the four options away and just accept option No. 1, which is no change?

My Lords, this is a consultation about the statistical properties of the RPI and is being undertaken by the independent Office for National Statistics. The UK Statistics Authority is required by statute to promote and safeguard the quality of official statistics, and that is exactly what the Office for National Statistics is doing. I say to my noble friend that things have evolved since 1956, a time when the RPI included the rabbit and the mangle.

My Lords, the Government will know that pension funds are major investors in government debt and that any changes to index-linked bonds will have far reaching implications. Two questions arise from that. First, how will the growth agenda, which is non-existent just now, prosper without pension funds, which the Government want to get involved in infrastructure? Secondly, with pensions being lessened even more as a result of being linked to CPI, the question arising from pensioners is, “Why are we disproportionately paying for the Government’s deficit reduction programme?”.

My Lords, I should emphasise that this exercise, on which I am endeavouring to answer, is a consultation process and that it is only at a latter stage and under very special circumstances that Ministers would become involved in it. If a recommendation were to be made by the statistics authority, the Bank of England would be consulted on whether any proposal would be a fundamental change to the basic calculation of the RPI that would be materially detrimental to the interests of holders of relevant index-linked gilts. It is only at that stage, if the Bank considered a proposed change to the RPI to be fundamental and materially detrimental, that the agreement of the Chancellor would be required. As I have said, I do not think that any of us should prejudge an independent consultation.

My Lords, did I gather from my noble friend’s answer that the effect on gilts is the only consideration that the Government would have before they made up their mind on this?

It is obviously one of the considerations, but there will clearly be a number of considerations. There are effects in terms both of the liabilities for index-linked gilts as well as the assets. However, the point that I wish to make is that there is a process by which all these considerations are made and there are regular reviews of the RPI.

My Lords, in their first Budget, the Government sneaked through a decision to link future benefit increases to CPI rather than RPI, a move which the IFS said would save about £5.8 billion by 2014-15, taking that money out of the pockets of the poorest. If RPI does change, will the Government revisit that decision?

My Lords, again, I return to why we are where we are with this consultation. Among the key indexes that I have learnt about that I did not know much about is the Carli index. This index has now been discontinued by every other large advanced economy. The IMF has concluded that Carli, which is a major part of the RPI, is not an appropriate formula for inflation measures. On the point about pensions, this is a Government who have made the largest ever cash increase to pensions, to £107.45 a week. Of course, the Government’s triple guarantee means that the basic state pension will increase by the highest of growth in average earnings, the CPI or 2.5%.

My Lords, it is a shame that the noble Lord did not answer the question just put to him. Given that the Government changed from RPI to CPI on a permanent basis, despite the fact that we hope that the deficit is only a short-term one, it will cost people for many years to come. Will that be reviewed? Is this review of RPI really just statistical or is it a way of disguising cost of living increases caused by fuel and VAT?

My Lords, I have to return to why this is happening. It is happening because of the National Statistician and under statute. Having looked at previous Questions when the noble Baroness’s party was in office, precisely these things happened then, too: there were these reviews. This was about an independent inquiry. I hope that I tried to answer the last question, which is why I discussed the Carli index—a key part of RPI. In many countries it has been rejected as the sensible way of dealing with things such as cost of living increases.

My noble friend positions this as a mechanistic change, which is what the ONS suggests. Nevertheless, is it not true that one of the options is basically looking to a change which will be virtually 1% off RPI? That is hardly mechanistic. In terms of consultation, can we now hope that the ONS will have a full and open consultation and extend the date beyond 30 November so that people can respond?

My Lords, my noble friend is right that the consultation closes on 30 November. I actively suggest that, as the Office for National Statistics said, it wishes to hear from as many people as possible as to the opinions on the four options available.