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Inflation

Volume 798: debated on Monday 1 July 2019

Motion to Take Note

Moved by

That this House takes note of the Report from the Economic Affairs Committee Measuring Inflation (5th Report, HL Paper 246).

My Lords, I can see by the size of the exodus from the Chamber that many may regard this as a dry, technical report, but it is in fact a revealing tale of how complacency on the part of the statistics authorities and opportunism on the part of Governments have led to the use of inflation statistics leaving many people worse off. I asked my noble friend the Minister about this at Question Time and he assured me that he would deal with it comprehensively. I look forward to hearing his response.

The committee’s attention was drawn to the problems with the calculation of the retail price index through a series of articles by Chris Giles in the Financial Times, a long-time campaigner on these issues. We asked the Governor of the Bank of England about these problems during his annual evidence session with the committee last year. He told us that the RPI had “known errors”, should not be further embedded in government contracts, and that if there was anything the committee could do to advance this process, we would be providing “a real service”. I hope that we have risen to the Governor’s challenge.

We began our inquiry a year ago in June 2018 and reported in January of this year. Before I discuss the findings, I would like to thank the committee staff who produced the report: Luke Hussey, Ben McNamee and Lucy Molloy. Ben McNamee is leaving the committee after five years to go to work for the National Infrastructure Commission, following our report on HS2. He is the original gamekeeper turned poacher, and we wish him well.

Chapter 1 of the report describes the history of consumer price inflation. There are two main measures of consumer price inflation in use in the United Kingdom: the retail price index, which was introduced in the 1950s, and the consumer price index, which was introduced in the 1990s following the Maastricht treaty. Both indices are based on the changes in price of a fixed basket of goods and services, but there are a number of differences between what the indices cover and how the price changes are calculated. One of the main differences is how the two indices calculate the average price change for unweighted items in the basket: that is, items on which a proportion of household spending is not available for the level at which prices are collected. It may help to give an example to illustrate this point.

The survey used to calculate the indices will reveal the proportion of household spending on potatoes as a class of goods, but it will not reveal the spending split between the different varieties of potatoes—say, King Edward or Maris Piper. This means that the price changes of different varieties of potato—the price of King Edwards may rise by more than Maris Pipers, for example—cannot be weighted according to household spending. A method is therefore required to calculate the average price change when expenditure weights are not available—I hope your Lordships are following me so far. The RPI does this for some items through the Carli formula, which uses the arithmetic mean. The CPI, however, largely relies on the Jevons formula, which uses the geometric mean. Statisticians have been debating which is the preferred formula since the 19th century. We set out the arguments in chapter 2 but decided, probably wisely, not to enter into that debate.

This difference in how to calculate price changes for unweighted items leads to a difference in the inflation rate which each index produces. The gap between the CPI and the RPI-recorded inflation rate, which is attributable to this methodological difference, is referred to as the “formula effect”. In December 2009, the ONS estimated that the formula effect was responsible for RPI recording the rate of inflation as 0.54 percentage points above the rate recorded by CPI. However, by December 2010, the difference had increased to 0.86 percentage points—a 0.32 increase. What caused this substantial change? In 2010, the ONS changed the way it collected prices for clothing. It increased the sample size of clothing it recorded prices for, relaxed the rules on what types of clothing were considered comparable, and began collecting prices during the January sales. This is colloquially known as the strappy tops problem.

This was believed to be a routine methodological change, but it had a strange effect on the recorded price change of clothing in the RPI. From 1987 to 2009, the average annual price change in women’s clothing as measured by the RPI was a 2.5% decrease, but from 2010 to 2017, the average annual price change was an 11.1% increase. Something had clearly gone amiss. The ONS held up its hands and admitted that it had made an error. Witnesses were generally agreed that the interaction of the Carli formula with the new method of price collection was to blame for the overestimation of price rises. Although the error also affected CPI, it affected RPI more, and the ONS said that the change was responsible for 0.3 percentage points of the 0.32 increase in the formula effect.

That may sound very technical so far, but that error created real-life winners and losers. Who won? Holders of index-linked gilts. These gilts are linked to RPI, and the resulting 0.3 percentage point increase in the index led to an undeserved windfall. Chris Giles has estimated that the value of interest payments received by index-linked gilt holders was increased by about £1 billion a year. Who lost? Commuters, because rail fare increases are linked to RPI, and students, because the interest on student loans is linked to RPI. The increased difference between inflation as recorded by RPI and CPI also encouraged Governments to engage in the practice known as index shopping. Benefits, tax thresholds and public sector and state pensions were all switched from being uprated by the higher RPI to the lower CPI.

This brings us to the most surprising part of the story, with which my noble friend refused to engage at Question Time. The UK Statistics Authority, of which the ONS is the executive arm, has refused to correct the error, despite admitting that it had made a mistake. Why? As the correction of the error would be likely to reduce the rate of RPI inflation, it would adversely affect holders of index-linked gilts.

The 2007 Act requires the authority to obtain the consent of the Chancellor of the Exchequer to such a change. Sir David Norgrove, the authority’s chairman, told us that the 2007 Act meant that there was no point in requesting the change, as the Chancellor would just say no. Last week, he wrote to me to say that he was unable to reply to our report after all this time as discussions with the Government continue. In my mind, this undermines the independence of that body. The National Statistician, John Pullinger, who retired last week, suggested to the committee that Section 7 of the 2007 Act required him to take into account the interest of those who would be affected negatively by any such change, such as index-linked gilt holders.

This is not the committee’s interpretation of Section 7. Section 7(1) gives the authority the objective of,

“promoting and safeguarding the production and publication of official statistics that serve the public good”.

Section 7(3) states that the authority should,

“promote and safeguard … the quality of official statistics … good practice in relation to official statistics, and … the comprehensiveness of official statistics”.

Section 7(4) states that,

“references to the quality of any official statistics includes … their impartiality, accuracy and relevance, and … their coherence with other official statistics”.

The committee’s reading of this is that the authority is, to put it mildly, at risk of failing in its statutory duties by its refusal to attempt to correct the clothing error in RPI, which it openly admits. It is not for the authority to pre-empt the decision of the Chancellor, as its chairman suggested. The Chief Secretary to the Treasury told us that it was difficult for the Chancellor to say yes or no to a proposal he had not received. The Chancellor told us that he was happy to hear from the authority. The committee was unconvinced by the National Statistician’s suggestion that he should take into account the interests of index-linked gilt-holders when deciding whether to make a change. It is not clear from section 7 that this is a relevant consideration to be taken into account. We believe that the authority is required, by its statutory duties, to attempt to fix the issue with clothing prices.

The decision not to correct the error is part of a wider neglect of RPI by the statistical authorities. Following a review of inflation indices, the authority removed national statistics status from RPI in 2013 and now treats RPI as a “legacy measure”. Following the recommendations of a 2015 review by Paul Johnson, it has resolved to make no further methodological improvements to the RPI. However, that is a very surprising stance, given that RPI remains in widespread use. Paul Johnson told us that he had changed his mind since his 2015 review. He said that his recommendation to make no further improvements to RPI was predicated on RPI being phased out. He said that given this has not happened, the committee should ask the authority to correct the RPI. We therefore called for the UK Statistics Authority to resume its programme of periodic methodological improvements to RPI.

When the Governor of the Bank of England asked us to look into this, he suggested that with three official measures of inflation—RPI, CPI and CPIH—it would be good to consolidate the focus into one. We agree, and believe that in the future there should be one measure of general inflation that is used by the Government for all purposes. To achieve that, work is required on how best to capture owner-occupied housing costs in inflation indices. Witnesses criticised the approach of the RPI which uses mortgage interest costs, and the approach of CPIH, which uses rental evidence. CPI does not account for owner-occupied housing costs, save for minor repairs.

We said that the UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on a best method of capturing owner-occupied costs. Once a method has been agreed, the authority—again, after consultation—should decide which index to recommend as the Government’s single general measure of inflation. We would like to see that adopted within five years.

Sir David Norgrove told us that RPI is not a good measure of inflation and does not have the potential to become one. We disagree, and believe that an improved RPI would be a viable candidate for the single general measure. A single general measure of inflation would prevent governments from index-shopping. Table 2 on page 39 of the report shows that when the Government are making payments to the public, CPI is the index used to uprate payments; but when the public are making payments, it is RPI that is used. The Government say that they are changing that. However, in May this year, the latest example was when National Savings and Investments index-linked savings certificates were switched from RPI to CPI. In other words, pensioners and savers around the country are being cheated. It appeared to be a switch motivated by its favourability towards the Government, rather than a principled approach to uprating.

The present Government, however, have taken some steps to address the imbalance. Business rates were changed to be uprated by CPI rather than RPI, and discussions have taken place around uprating rail fares by CPI rather than RPI.

A single general measure would remove the temptation to index-shop. As the single general measure of inflation will take time to be implemented, the Government need to take interim action to stop this unfair practice. They should switch to CPI for uprating purposes in all areas where they are not bound by contracts to use RPI. The exception to this recommendation is the interest rate on student loans. As recommended in our report, Treating Students Fairly, this should be reduced to the 10-year gilt rate—something that the Augar review, which we will debate tomorrow, was not able to recommend because, I am told, the Treasury leaned on committee members to say that they should not make any recommendations that would result in increased public expenditure.

This interim switch to CPI should also apply to new issuances of index-linked gilts. We heard evidence that there was sufficient demand for CPI-linked gilts. Ben Broadbent from the Bank of England dismissed concerns from the Debt Management Office that the existence of CPI and RPI-linked gilts would lead to market fragmentation. Anyone who knows anything about the gilts market knows that an argument about market fragmentation lacks some credibility. We heard concerns about the effect that the change to the calculation of RPI would have on existing index-linked gilts, the last of which is due to mature in 2068 for private sector bonds and pension schemes. As some witnesses discussed, a sudden change, such as redefining RPI, CPI or CPIH, would be inappropriate, but once the single general measure of inflation is in place, the Government and the UK Statistics Authority should decide whether RPI, if it is not the chosen measure, should continue to be published in its existing form or whether a programme of adjustment should be made to RPI so that it converges on the single general measure.

To avoid disruption, any programme should take place gradually over a sufficiently long period to a plan that was clearly communicated at the outset. That includes our recommendations. The Spring Statement said that the Government would respond to a report by the end of April. The Chancellor wrote to me on 30 April to say that the issues raised in the report are “complex and wide-ranging”—a bit like social care, which we will report on next. He said that the “breadth, complexity and importance” of the issues meant that the report requires further education. Sorry, I mean further consideration—a Freudian slip. He said that the Government would respond to the committee’s report as soon as is practicable to do so, but wrote to me last week to say that the issues are so complex that the report requires further consideration.

The report cannot remain unanswered. It raises serious questions about decision-making by the statistics authorities. The Government and the UK Statistics Authority need to address the challenges highlighted by our report. I beg to move.

My Lords, we live in strange political times. I find myself in complete agreement with everything that the noble Lord, Lord Forsyth, said. I think that I speak for the rest of the Economic Affairs Committee in acknowledging his skill as a conciliator—the House will be very familiar with that—which has enabled us to produce not just this report but a number of others, which I hope will be of value in decision-making as and when the next Government are formed. Before I proceed, I draw the House’s attention to my entry in the Register of Lords’ Interests: since the report was produced, I have become a trustee of the International Valuation Standards Council, which some might consider relevant.

The debate is essentially about the role of the UK Statistics Authority and, bluntly, what it is for. It is also about the integrity of statistics and the trust in institutions. For a long time—indeed, a number of decades—there has been a move away from Governments deciding things that can be controversial towards putting them in the hands of independent agencies or organisations, such as the UK Statistics Authority. This will work only if they show that they are truly independent and are acting in the public’s best interests so that we can maintain confidence.

Inflation matters, as the noble Lord, Lord Forsyth, pointed out. The rate of RPI and how taxes are indexed affects how much millions of people pay, whether on their fares, whether they are students, and so on. It is not only a technical issue; it matters a great deal to the well-being of millions of people in this country. That is why it is so important that we have confidence in the Statistics Authority. As the noble Lord said, nowhere in the 2007 Act—which set up the United Kingdom Statistics Authority, made it independent and gave it responsibility for the maintenance, integrity and accuracy of the statistics—does it say that it should consider other matters, as he said that its chairman told the committee. We find that difficult to understand because, for this authority to work, it has to be independent.

The 2007 Act not only requires high standards of stewardship but specifically gives the authority responsibility to compile and maintain the retail prices index, which the authority and everyone else agrees is defective at the moment. It is flawed—and has been so for almost 10 years—yet apparently nothing is going to be done about it. It is worth labouring the point that, at a time when it has become fashionable to denigrate experts and trash institutions, to find an institution such as this inflicting harm on itself is deeply depressing. The only way this authority will command respect is if it recognises that a mistake has been made or that there is a flaw in the statistics, and does something to put it right.

The authority knows that RPI is flawed. It refers to the RPI as a legacy matter—some legacy; it is being used, day in, day out, to calculate people’s entitlement—and that it is not a good measure of inflation. There have been arguments about this for the past 100 years or so but in this case since 2010, because of the methodological point raised by the noble Lord, we know that the inflation measure is higher than it would otherwise be. As I have said, this is not just an academic issue because it matters to people.

The authority has also said it wishes to discourage the use of the RPI. If that is its ambition in life, I am afraid that has failed as well. Members of the public think the RPI statistic is the main measure of inflation. It is better known than the CPI, let alone the CPIH, which is hardly known at all outside a narrow field of public opinion.

It is vital for the Statistics Authority to reconsider its position. When the chairman said to us that there is no point in going to the Chancellor because he will say no, that is to completely misunderstand the authority’s position. It is there to act in the public interest and to say to those who are elected—the Chancellor of the day—that they need to do something about it. They should not just assume—I suspect it is an informed assumption, in the usual way—that such a recommendation would not be welcome. None the less, it needs to be dealt with. As a former Chancellor, I am aware that if I were the Chancellor of the Exchequer I would probably find it unwelcome. However, having received other things that I felt unwelcome in my time in office, I do not see why I should treat this one any differently. You have to get on with it. Frankly, it does not do the Government’s reputation for policy-making and making decisions any good to carry on with a procedure that we all know is fundamentally flawed.

The noble Lord, Lord Forsyth, eloquently made the point that many gain from this—if they hold government gilts they are gaining handsomely—but many other people are losing. Sooner or later they will wake up to the fact that they are losing and will continue to lose unless something is done about it. I appreciate, too, that there will be a cost to the Exchequer if this is to be done too quickly—although I have read the utterances of the two candidates now vying to be the next Prime Minister, and fiscal rectitude does not appear to be the order of the day. They may have a more open mind than I might have had as to how much money they are willing to spend, as there does not seem to be any constraint on that at the moment.

The committee has raised an issue of great importance, in outlining not only the practical results of a flawed RPI but the more fundamental question that, if Parliament decides to put these matters into the hands of an independent authority, unless that authority exercises its judgment, does what is right and what it is required to do in the Act of Parliament, one is bound to ask what on earth is it for.

My Lords, my noble friend Lord Forsyth has achieved a notable success in making statistics both interesting and controversial. Normally there is nothing so dry as statistics, but he has demonstrated by his speech, the committee by its report and the noble Lord, Lord Darling, by his speech that statistics are not only dry but have a profound impact on people’s standard of living, sense of well-being and, therefore, political attitudes. The choice between the RPI and the CPI, with its problems, means that people are either better off than they thought they were or they have resentment because they are worse off than they should be. In practical terms, that means that decisions that ought to be taken in a democratic fashion, and debated and made judgments on in Parliament, are left at the whim of statistical inconsistencies. This is very wrong.

Having listened carefully to my noble friend and the noble Lord, Lord Darling, it is difficult to think of anything to add to what they have said. I had prepared a speech, but everything that I had intended to say has already been said. Rather than make that speech, I should like to emphasise, in no particular order, what is at stake: first, the position of the statistical authority; secondly, the way in which the Government make judgments between different sections of the community—bond holders, students, commuters and the rest; and, thirdly, as a result, the way in which decisions are taken in Parliament that have an immediate impact on the lives of ordinary people.

My noble friend Lord Forsyth has carefully explained our recommendations, and it remains for me to say only that this important debate demonstrates the unanimity of the members of the committee, who are people drawn from each of the political parties, of different backgrounds and approaches, in supporting this important report. We look forward to what my noble friend Lord Young will say. Earlier, he said that he had been a Treasury Minister, and we look forward not only to his response but that of the Chancellor of the Exchequer, whoever he may be in a short time.

My Lords, I declare an interest: in two weeks’ time, I begin to receive a Civil Service pension that will be uprated by the consumer prices index.

I congratulate the noble Lord, Lord Forsyth, and his committee on a rigorous and high-quality report, and on securing this timely debate. Public confidence in statistics is essential in a liberal democracy. I recall the words of Sir Michael Scholar, the first chairman of the independent UK Statistics Authority, who, incidentally, was appointed by the noble Lord, Lord Darling. He said:

“For me, good statistics is like sound money or clean water, it is an absolute necessity and if you do not have it things go seriously wrong”.

When it comes to economic statistics, measuring the rate of inflation is perhaps the most important statistic of all. Maintaining the value of a benefit, tax or charge has been hardwired into our social system since the Rooker-Wise-Lawson amendment of 1977.

I fully recognise that estimating the overall price level at any time is not easy, and I have considerable sympathy with the statisticians at the Office for National Statistics who must wrestle with this problem. Nobody has the same spending pattern. Expenditure tends to vary with age and income. Consumer habits and technological innovation mean that spending patterns are continually evolving. There is also a regional dimension, in that a lettuce will inevitably cost more on Uist than in Kent.

I was Permanent Secretary to the Treasury when the UK Statistics Authority, on the advice of the National Statistician, withdrew the retail prices index’s status as a national statistic in January 2013. At that time, it seemed that the RPI’s days were numbered. I knew that there would be a transition before the ONS and the Government alighted on a new arrangement, but six and a half years on I am surprised at how little progress has been made. I can understand the Treasury dragging its feet. At a time of fiscal consolidation, index shopping was helpful if, as the noble Lord, Lord Forsyth, pointed out, opportunistic, but there comes a point where such an approach damages the wider credibility of government policy, and we are now past that point.

I thought the UKSA handled the issue in textbook fashion in 2013, but since then it has been less sure-footed. It is no longer credible for the UK Statistics Authority to hide behind the Government. It needs to be clear about what is the best measure of inflation, and it needs to move the retail prices index into line with that measure.

Personally, I think the committee has been rather too kind to the RPI as currently constituted. It is not just the clothing formula which is the problem; it is the use of the Carli formula more generally. No other country uses it. Canada dropped it for sound reasons in 1978. Everybody else, with the exception of Slovenia, uses the Jevons formula. As Paul Johnson said in his 2015 review,

“Carli should not be used in any index aiming to achieve a good estimate of changes in consumer prices”,

and further it,

“is not suitable for use”.

Dr Ben Broadbent in his evidence to the committee reinforced the case against Carli saying that its failings,

“have been evident for a century”

I know this country welcomes exceptionalism, but we really ought to adopt international best practice. I would therefore advise against keeping the Carli index on life support. It is better to put it out of its misery once and for all.

Dropping Carli will have big implications for people who use the RPI. Having criticised the UK Statistics Authority for slowness, I should give it credit for its approach to consultation hitherto, and I hope it will consult further as and when—I hope it is soon—it reaches a definitive view on the way forward. I recognise that the UKSA is independent of government, but I would be grateful if the Minister could confirm that consultation lies at the heart of the UKSA’s and the Government’s strategy when it comes to change.

A reformed index would mean a transfer of resources to rail travellers and graduates with outstanding loans. The Government, understandably, have not recognised these groups as priorities hitherto, given competing calls on taxpayers’ money, but it is always open to the Government to change the relevant uprating formulae, just as they introduced the triple lock to underpin the state pension.

This brings me to the vexed issue of index-linked gilts. My recollection is that this was the swing factor when the Carli problem first emerged in 2013. I can see why the Treasury and the Debt Management Office do not want to disrupt the gilt market—it is to their credit that it is one of the most efficient markets in the world—but here the committee’s report is persuasive. First, whether or not the ONS changes the basis of the RPI, the market is sufficiently big—and it is likely to get bigger with current spending proposals—to be able to bear CPI-based issues existing alongside gilts indexed to the RPI. As the committee’s report makes clear, there are only three index-linked gilts left with a requirement that the Treasury buys them in at par if there is an index change. All will have expired by 2030, and even if the Government had to buy them in, I do not believe that would prove too disruptive, not least because at current prices few, if any, holders would want to exercise the option.

I urge the UK Statistics Authority and the Treasury to act. Maintaining the status quo is increasingly untenable.

My Lords, I begin by referring to a remark made by the noble Lord, Lord Macpherson, about the confidence that people must have in statistics. I was on the Retail Prices Index Advisory Committee for many years when I was at the TUC. I draw attention to the fact that a very strange omission in the report, which the noble Lord, Lord Forsyth, did not mention, is that what most people associate with the RPI is not gilts or housing costs but wage negotiations. The bedrock of all wage negotiations is the RPI. No one anywhere would think that the yardstick in wage negotiations could ignore the RPI.

Before we scrap the RPI—some people want to do that, so let us make no bones about it—we have to relate that to the dictum about confidence. If anybody in this country ever starts to think that somebody has a vested interest in tinkering around with the RPI, that will be a very bad day indeed. For that reason and others, I am glad that the committee has come down on the side of reforming the RPI but not abandoning it.

That being the case, I would like to put a question to the Minister. Is he aware that, in recent months, there has been a concerted campaign from somewhere in the newspapers, where any reference by economic correspondents to the RPI is preceded by the adjective “discredited”? If you pick up any dozen references in the last six months to the RPI or any consideration of it in the newspapers, you will find the word “discredited”. Where is this adjective coming from? It must be coming, I suspect, from the Treasury or the Bank of England. I would like to hear any other suggestions about where it is coming from, but these organisations have regular confidential conversations with economic correspondents —I do not think that the ONS does in quite the same way.

For the first time, we are in danger of making this issue into a bit of a political football. It has never been a political football, and I hope that it never will be. I do not even think that Boris Johnson would have it in mind to remove Brussels sprouts from the index. There has never been any political interference with it. The advisory committee has always tried to reach an agreed conclusion, although I think that some years ago there was a vote about something to do with housing costs.

That leads to my second point, which is that there is no perfect solution. I thought that the noble Lord, Lord Darling, let his rhetoric run away with him in implying that somehow a clear overall message was coming out of this and that something ought to be done about it. It is a very delicate balance indeed.

On housing costs, I think that the report says almost in these terms, “Well, we don’t much like housing costs being in the index, but on balance we can’t have an index without them in it”. If that was not in this committee’s report, it was in that of another weighty committee not so long ago. Housing costs are inherently very difficult because, unlike Brussels sprouts, they are ultimately a question of the valuation of land. We all know that economics textbooks refer to the factors of production being land, labour and capital, but in practice, of course, land is not a factor of production—as somebody once quipped, “They don’t make much of that any more”. The house price question has been a main driver of the change in economic activity in many parts of the country—exacerbated, I would say, by the component of RPI that we cannot take away—and there is obviously a difference between the received estate agent index affecting London and that affecting Aberdeen or Aberystwyth. So there are a number of delicate dilemmas.

I recognise that the committee does not conclude with a broad rhetorical flourish; it concludes with some careful recommendations—not throwing javelins at random in the direction of somebody at fault who has not been paying attention. That is why Mr Boris Johnson’s namesake himself adjusted his position to look at this thing in the round. Broadly speaking, I think that this is a good report, but there are arguments on both sides of many of the questions under scrutiny.

Yes, it is true that the RPI is generally a bit above the CPI, but that is factored into much of industrial life. Saying that there should be just one index is a dangerous road to go down when all the academic literature at least pays lip service to the notion that, if you are looking at macro policy or international monetary policy, you probably need something constructed along the lines of the CPI. But given that historically, ever since the Ernest Bevin era when it was created as a cost of living index, the retail prices index has had confidence, we should stay with it. On getting a solution to the clothing dilemma, I do not totally understand it, but clearly it is correct to have that recommendation.

The people at the receiving end of statistics such as the RPI might expect the House of Lords’ Economic Affairs Committee to include some people who have been a bit more involved in wage negotiation; there are no such people in sight on the committee and this is relevant to the point we were debating half an hour ago. This is a matter for the man and woman on the street; it has become a bit of a debate between the economic academics, the Treasury and the Bank of England.

I finish with the theme on which I began, which is that it is a pity that there should be this relentless and democratically not very sensible campaign on the part of certain bodies—I suspect that it can only be the Treasury and the Bank of England—who keep putting the word “discredited” before “RPI”. Given the state of Britain now, that is not a very sensible thing to do. Although the RPI is not perfect—and no index is—many of the criticisms made of it reflect a misunderstanding of its purpose and are implicitly based on the erroneous assumption that it should follow in full the economic principles suitable for indices such as the CPI and CPIH.

I am sorry for making a rather long statement, but one cannot say that people should accept in their wage packets a difference of minus £350 a year by shifting from the RPI to the CPI. That is a street level understanding of the question, not a highly academic one.

My Lords, I support this report from my noble friend Lord Forsyth and his committee. There is very little that my noble friend and I disagree on. He trained me well when I was his PPS many years ago and I fully support the thrust of this report. The governance and probity of the UK Statistics Authority has quite rightly been called into question. The parts of the report that go into the legal basis for it leaving in place what is clearly an error as far in the RPI calculations must be addressed quickly.

As someone who takes a particular interest in disability benefits, over the years it has been a matter of great irritation to me—I put it no stronger than that—that there are winners and losers. As my noble friend described, the Government’s index-shopping is a sleight of hand; unless one is engaged every day in studying these types of statistics, the average person in receipt of this increase or decrease is probably not going to notice it in actuarial terms, but will certainly notice it in their pocket. Therefore, I support what the report is suggesting.

In Box 1.A of last year’s Budget report, it seemed that the Government recognised only too well that there is a fundamental problem here. They said that,

“the government will not introduce new uses of RPI”,

which makes me think that they are more aware of what needs to be done than they have indicated to my noble friend in correspondence.

I am grateful to my noble friend. That may well be the case, but they did introduce a new use of CPI with National Savings.

Indeed. I used the phrase “sleight of hand” quite deliberately. Clearly, there needs to be some fundamental change here. The legal basis for the change is well set out in my noble friend’s report. I find it rather strange to be debating whether something that has been proven in law to be wrong should or should not be changed, and why there are so many reasons against changing it. A can-do approach by the Treasury is needed to bring about the committee’s recommendations.

I am not going to speak for long, although I should declare that I am one of those elderly pensioners in receipt of some government index-linked investments—a very modest holding. I do not know whether that will be good or bad. I think it has been bad already, but never mind—I have declared it to the House.

My noble friend said that at some point in the evidence session to the committee, somebody—I have forgotten who—said that they should be cautioned against market fragmentation of the gilts market, and my noble friend said that that was most unlikely. I share that view. However, in the two areas of gilts that are addressed in the report, one of those organisations already holds gilts with the dates as set out by previous speakers, and that particular group needs to be addressed. With the future issuance of gilts, if there is just one rate it also means that anybody looking at it to decide whether it is a good investment would at least know where they stood.

I would also like my noble friend to bear in mind that, for investments and savings generally, we are in an age of trading by algorithms. Huge sums of money are moved around in nanoseconds. Whether it is the manager of a corporate pension fund or the individual being given financial advice about quite a modest investment, gilts have for many years been the foundation of good advice. The fewer assets people have, the more they are recommended to have a higher holding of government-based investments rather than the equity-based ones which have the higher risk, which we would all be familiar with.

The way in which the changes to gilts are brought about, as outlined in this report, needs some careful handling. It would be detrimental to best advice and best interests, for the corporate and individual investor and the reputation of gilts, if the changes that are clearly necessary resulted in people becoming nervous or not feeling it worth while to have at least a floor of that type of investment, particularly when it is a mixed investment. Over the years, we have seen fewer people prepared to take smaller returns on investments; they have what is almost a cavalier approach to savings and investments. Gilts have played a very big part in securing what most people would recognise as best advice. The changes are necessary for those who already hold gilts and those who will consider newly issued gilts. I hope it will be understood that the security of gilt-edged investments is an important part of that good advice, which our financial services market has relied on for many years.

My Lords, I too thank the noble Lord, Lord Forsyth, for securing this debate and chairing the committee so effectively. I found the inquiry rather a strange experience to begin with. I had spent almost 20 years in the Treasury worrying about how to control inflation, yet in this inquiry we were deep in the detail of measuring inflation down to a few decimal points. In the process, as has been mentioned, we became aware of a series of quite surprising events that cast doubt on the Government’s various measures of inflation. I should like to develop some of those concerns.

I well recall that the main governance for the RPI until the mid-1990s was the existence of the RPI advisory committee, which consisted of some officials and a number of stakeholders, including the trade unions. The noble Lord, Lord Lea, mentioned that he was for many years a representative on that committee; there were also business representatives. My recollection is that the advisory committee found it difficult to accept any change that made a significant impact on the inflation rate, one way or the other. Indeed, there was a strong and continuing concern to uphold confidence in the RPI measure of inflation, for the reasons he mentioned.

It turns out that the RPI advisory committee did not meet between 1995 and 2007. I was somewhat surprised to learn this. It was charmingly referred to by the ONS in its evidence to us as a period of “no governance”. Then in 2007, we had the Statistics and Registration Service Act and the introduction of the RPI protocol. This required the ONS to produce a monthly figure for the RPI and introduced the formality we have heard about: that the Chancellor had to give his consent to any fundamental changes judged by the Bank of England to be materially detrimental to the holders of relevant gilts.

Paradoxically, this legislation, designed for the worthy purposes of increasing the independence of the Statistics Authority and improving the governance of the RPI, turns out to be a contributory factor in the loss of confidence in the RPI as a measure of inflation. In my mind, this stems from the asymmetric treatment of changes that are detrimental to the holders of gilts, as opposed to changes that are to their advantage and to the detriment of others. This is set out in the statute.

As we have heard, where a fundamental change is seen as materially detrimental to the holders of gilts, the Chancellor, with advice from the Bank of England, has to decide whether the changes should go ahead. By contrast, if changes are beneficial to the holders of indexed gilts, the Bank of England is not required to take any action. This asymmetry became evident in 2011 and 2012, when there was a change in measurement of clothing prices, as we have heard. I argue that the Statistics Authority then made some quite serious mistakes.

The effect of the change was, as we have heard, an unexpectedly large increase in the clothing component of the index and an increase in difference in the growth of the RPI and CPI to around 0.8% a year, instead of 0.5%. I stress that, in the evidence we received, there was a lot of criticism of the change, along with claims that it had not been tested before implementation. This was the first mistake.

What I conclude to be a second mistake followed, which was not to undo the change and to go back to the previous arrangements reasonably quickly, when the emerging problems became evident. It became clear that the statisticians were influenced too much by worries that it would be judged a fundamental change that was materially detrimental to gilt holders. The one-sided nature of the protocol meant there was no requirement to be concerned about the original change, which had materially advantaged gilt holders. Instead, the options were studied and the focus switched to the weighting system and horrendous technical debates about the merits of different methods of compiling the two indices. This response is a classic case of the best being the enemy of the good. Reversing the clothing changes would not have removed the whole difference between the two measures but would have dealt with it in part. Reversing it quickly might also have been seen as a correction and not a fundamental change.

There followed what I think we all agree was a third mistake: the decision to maintain the RPI in its current form, but to declassify it as a national statistic and consider it a legacy measure, with no further improvements to be made. This was astonishing, because it was evident that the RPI would be in place in contracts for many years, both for gilts and pensions. The committee raised the question of whether admitting that this statistic is flawed, but refusing to fix or maintain it, leaves the authority failing in its statutory duties.

Another related governance aspect of this story worries me, which was emphasised by the noble Lord, Lord Darling. The authority admitted that it had been reluctant to propose a change to the Bank of England when there was a significant risk that it would be told that it was a fundamental change likely to go to the Chancellor. This fails to follow what is set out in the legislation. I have some experience of public bodies, where the framework for their independence is set out in statute but there is a requirement to obtain the agreement of Ministers on a limited number of occasions. My interpretation is that it is for the public body to take a view about changes that should be made on professional grounds and not to shrink from referring them to Ministers for their approval, when required. In this case, it is not for the statistics authority to seek to guess the Bank’s response before deciding whether to propose changes; the decision should be taken on professional statistical grounds. It is then for the Bank of England to decide the materiality and potential detriment and for the Chancellor, in turn, to take a view on whether the proposed change should go ahead.

The committee has come forward with a sensible and workable set of proposals to try to get us out of this stand-off. At the same time, we should reflect on aspects of the governance of national statistics. As I said, the drafting of the legislation is unhelpful because of the asymmetric treatment of gilt holders and other stakeholders, not least those saving through government saving schemes. Even taking the legislation at face value, surely it is possible to make changes necessary in the light of changes in markets and product innovation without them being classed as fundamental and so that, when a mistake is made, repairing it is seen not as a fundamental change but as a tiny correction.

My Lords, I pay tribute to my noble friend Lord Forsyth, who has been a doughty campaigner on this critical issue.

It is a universally acknowledged fact that inflation is not a glamorous topic; nevertheless, it runs through and buttresses almost all our spending activities. From Treasury bonds to train tickets, inflation is a vital measure by which pricing is calibrated. For all regulated prices, index inflation is the benchmark by which standards are set.

Sadly, in 2010 we made a foolish error, the difficulties of which we are still grappling with. A mistake crept into the retail price index as the standard measure of inflation. RPI is itself flawed for a multiplicity of reasons, many of which are elegantly pointed out in this report. The fundamental point, however, is that RPI, as currently calculated, tends on the whole to penalise those who earn their money and advantages passive investors. Since RPI is in almost all cases higher than the consumer price index, the winners are those who hold bonds or have invested in benchmark-linked indices. The losers are those who suffer high water bills or see the cost of their train tickets go up year after year. Chris Giles of the Financial Times, who has done excellent work on this, has estimated that bondholders have benefited by £1 billion a year since 2010.

I welcome the Treasury’s efforts to diversify away from RPI, but this work needs to be accelerated to cut off the fleecing of the British public. The Treasury’s response to concerns raised some time ago was questionable. When asked to justify its continued use of RPI in the Budget, the response was that it was “complex and potentially costly” to the Exchequer to move away from RPI. But what of the consumers who were negatively affected?

The Government’s priority should be the welfare of citizens, and it is hard to shake off the sense that this might have been overlooked. It is certainly concerning that the Government should take money from people on an RPI basis and give it out on a CPI basis. Index shopping as a method of regulating spending undermines public confidence in public spending and gives rise to a justified sense of grievance. If every public body which made an error to its advantage refused to fix it, public confidence in the administrative state would collapse altogether. Does the Minister consider this a justifiable trend?

I accept that there are legitimate concerns over such a move. Some in finance have come to rely on high returns. However, the concerns over RPI have been clear for so long that reform must be priced into the models of those who work with bonds daily.

Some make the case that it could cause hardship to those exposed to index-linked gilts, but it is a clear term of all gilts, and written into the purchase contract, that the index need not be of a particular type but one that is recognised by the Treasury and the Office for National Statistics. Ultimately, this is down to the ONS and Treasury to fix, but the ONS has a duty to promote and safeguard the quality of official statistics. Until this is fixed, we might be forgiven for thinking that it is failing to carry out one of its core mandates. Will the Minister commit to a rapid phase-out of RPI in the next economic Statement?

My Lords, earlier today, the House confirmed my P45 from membership of the Economic Affairs Committee. I greatly enjoyed working under the chairmanship first of the noble Lord, Lord Hollick, and latterly that of the noble Lord, Lord Forsyth. It was also an exquisite pleasure to note the conversion of the noble Lord, Lord Forsyth, to the cause of social housing and—as we will hear—ultimately to more generosity in the provision of long-term care.

I want to take this opportunity to pay tribute to the work of the late Lord Jenkin of Roding, who had an enduring interest in the quality and integrity of national statistics. He was instrumental in passing the Statistics and Registration Service Act 2007, which brought about important changes to the governance framework. We have already seen some important interventions from the statistics authority where it has identified abuses or distortions; for example, the notorious £350 million claim in the Brexit campaign and its decision to alter the presentation of student loans in the national accounts to give a more accurate picture of the incidence over time of write-offs of debt.

Nevertheless, some significant controversies remain unresolved, some of which, as the House has heard, are of the statistics authority’s own making. Three steps brought them to a head. First, the then Government decided to specify the MPC’s inflation target using the CPI to bring us into line with the rest of Europe. They also explained that the CPI was running about 0.5% a year slower than the RPI. The switch allowed the Chancellor of the Exchequer to claim that he was targeting lower inflation without the Bank having to do much tightening. It also allowed him to tell Tony Blair, who was like the impatient boy in the back of the car and was disappointed that the five tests did not support entry into the euro, that we were getting nearer.

At that stage, the change was confined to the realm of monetary policy. The next event was around 2010, when the ONS made the now notorious change to the way in which clothing prices were collected, which had the immediate impact of widening the gap by another 0.3%. The ONS reviewed that outcome but surprisingly decided to do nothing about it. However, the statistics authority—I emphasise that it was the statistics authority; the noble Lord, Lord Lea, tried to claim that it was the Treasury or the Bank—then declared that the RPI was a very poor measure of inflation that did not have the potential to be developed into a good one. It would therefore go on publishing the RPI but no longer designate it as a “National Statistic”.

My Lords, although I attributed possible motive to the Bank and the Treasury, I said that my main concern was the lack of authority to put this adjective in front of it to say that it was discredited. On what basis can officials brief the press that the RPI is discredited?

The basis on which that was done was that the statistics authority said it was flawed; that, I thought, was sufficient. Anyway, it said it would go on publishing the RPI and no longer designate it as a “national statistic” but rather, treat it as a legacy measure, with no further work to develop it. The chief statistician said there were many flaws with the RPI. For example, if it is used in the Carli index, which is a very simple test, if something goes up by 25% and then down by 25%, it does not end up where it started—the so-called time reversibility test. It said that it was not worth changing the treatment of clothing if it was not going to look at all the other issues.

This policy of spartan neglect proved controversial, provoking the inquiry by the EAC. Our conclusion was that RPI was deeply embedded in many aspects of economic life—on this we agreed with the noble Lord, Lord Lea—and it was wrong of the statistics authority and the ONS to just walk away from it. Indeed, it was argued that the statistics authority had a statutory duty—

Will the noble Lord explain something to me? I do not understand his contention that one of the main reasons why RPI is discredited is that if something goes up by 25% and then comes down by 25%, it does not end up where it started. If any figure goes up by 25% and is then reduced by 25%, it does not end up where it started.

I think the noble Lord should go away and write this down on a piece of paper—I think he will find that it does not end up where it started.

I said it does not. In other words, it fails the time reversibility test. If it goes up by 25% and then comes down by 25%, it ought to end up where it was before, but the price level is not the same. We believe that if the ONS is going to continue publishing the RPI, it should have a programme for addressing the flaws that have been identified.

The EAC then looked into the implications of having two rival price indices. It quickly became apparent that the Chancellor had spotted the opportunities for index shopping, as others have noted. The view of the committee was that it would be better to move towards a single index combining the best characteristics of both indices: neither on its own is superior in all aspects. There should be a rolling programme of improvements, starting with the clothing issue.

One area which will need to be addressed is the treatment of housing costs. Here, in my view, neither index has yet found an ideal treatment. The CPI takes no account of owner-occupier housing costs other than repairs. The RPI includes mortgage interest, but of the 27 million households there are only 10 million owner-occupier mortgages. The ONS seems to favour creating a housing element based on rental equivalence, but the rental market is very distorted. Clearly, there is some difficult technical work to be done to find the best solution, which can then be adopted by both indices, and as other differences are resolved a single general measure of inflation can emerge.

The final issue we addressed was the indexation of gilts. Holders of these gilts have benefited substantially from the changes, probably wrongly, which boosted the RPI. There is a clause in the prospectus of early issues that says that if a change is proposed which is materially detrimental, it can be made only with the agreement of the Chancellor. I began to wonder what fool came up with this “heads I win, tails you lose” arrangement, which allows gilt holders to keep any windfall gains but not suffer any correction when things went against them. Then I began to wonder whether it was me, many years ago when I worked on monetary policy in the Treasury.

What to do next? Above all, we should not act precipitously but should give plenty of warning of our intentions. If, as recommended, a unified price index emerges, it should be applied to all indexed gilts issued. In the meantime, we recommended beginning the process of issuing CPI-indexed gilts. We were not convinced that issuing gilts with a different uprating formula would seriously fragment the market. For years, gilts have been issued with different coupons, maturities and tax treatments, and the market is big enough and flexible enough to find equivalent values for them. For existing gilts with maturities after 2030, the prospectus allows them to be linked to an index,

“which continues the function of being an officially recognised index measuring changes in the level of UK retail prices”.

In other words, if the change proposed represents the best professional advice, that index should be used and there should be no veto if it comes out better or worse than the previous index. I have never quite understood why the change in respect of clothing, which was regarded as technical when it happened, is now possibly being regarded as a fundamental change as it is reversed.

It would be nice to close on an upbeat note—that all these problems are being addressed under a new team—but I understand that the search for a successor to the retiring National Statistician has proved fruitless and that the deputy has been asked to act as an interim. That is not a good sign.

The new “Big Brother” Clock, which I regard as, basically, an electronic version of the noble Countess, Lady Mar, is probably telling me it is time to wind up.

My Lords, I was until today a member of the committee that produced this report. I record my thanks to the noble Lord, Lord Forsyth, for his wise and tolerant chairmanship, and also join him in thanking our clerk, our committee assistant and in particular the departing policy analyst, Ben McNamee.

Inflation may be—although I doubt it after listening to this debate—a simple concept. However, as this debate has demonstrated and as the committee very soon learned, measuring it is a far from simple exercise. Discussion of what these measures should be and of their relative merits can quite quickly become highly technical and apparently abstract, but what we agree inflation to be obviously has an enormous impact in the real world. That is why it is important to try to maintain some common-sense understanding of what is going on. Decisions made about how to measure inflation should be widely accessible to scrutiny and debate, not just confined to a priestly caste of economists, bankers and statisticians. Our report tried to help with that, and I will focus on just a couple of the major issues we discussed.

The first is whether the RPI is irretrievably flawed and should be abandoned, as the UKSA and the ONS had decided. As we have heard, the committee thought not. We acknowledged, as had the UKSA and the ONS, that the index was clearly flawed as a result of an untested and underplanned methodological change introduced by the ONS in 2010. I should say in passing that I was very surprised by the apparently casual way in which this change was implemented, and even more surprised that there was not an early attempt to rectify an obvious mistake. After all, the impact of the change was more or less immediately obvious. In December 2009, the RPI was about half a percentage point higher than the CPI, and in December 2010 it was nearly 0.9 percentage points higher. Nowadays, the RPI continues to run between 0.8 and one percentage point above the CPI.

This matters not only because it is the wrong number but because this wrong number has very significant real-world consequences. It has been a gift, as we have heard, to the holders of RPI index-linked bonds—a gift of around £1 billion in extra interest every year—and it has punished those people whose payments are linked to the RPI. Annual rail fare increases and the interest on student loans are examples of this.

You might reasonably have thought that it would be obvious that the mistake in calculating RPI should be fixed, but listening to the arguments for and against repairing the index was at times like listening to a theological dispute between medieval schoolmen. One of our colleagues, who is no longer in his place—the noble Lord, Lord Lamont—compared the whole thing unfavourably to listening to the arguments in the Council of Trent.

It seemed clear to us that some of the technical arguments, about the use of the Carli formula, for example, had been going on for a very long time and were unresolved—and perhaps even unresolvable. However, it seemed that the arguments in favour of repair carried significantly more weight than those against. This was in part because the arguments against seemed based very largely on a misreading by the ONS of its statutory duty and on its reluctance to take into account the widespread and continued use of the RPI.

The noble Lord, Lord Forsyth, explained our collective view of the ongoing misinterpretation by the ONS of its statutory duties under the Statistics and Registration Service Act 2007, and I will not repeat his arguments. However, I will say that the UKSA/ONS position on this strikes me as simultaneously cowardly and ludicrous. In essence, the ONS is saying that it will not ask the Bank for permission to repair the RPI because it thinks, correctly, that the Bank would have to ask the Chancellor and that he would say no. The Chancellor himself dealt with that when he gave evidence to us, as the noble Lord, Lord Forsyth, recounted. We believe that the ONS has a legal duty to ask for authority to repair, and we strongly believe that, when asked, the Chancellor should agree.

The second major issue we focused on was whether there was a need for multiple indices to measure consumer price inflation. We thought not. Some witnesses, including the UKSA and the RSS, defended the practice. Others, including the Bank of England, saw the case for a single index. They felt that it was not obvious why two were needed and that having multiple indices caused confusion and was counterproductive. In addition, of course, the existence of two indices has allowed the Government to indulge in the rather disgraceful game of index shopping, using the lower CPI for payments out and the higher RPI for receipts in. This is, at the very least, inconsistent and incoherent, as well as obviously unfair and, unfortunately, widespread. I am glad to see that the Government have made some moves towards fairness and consistency and we encourage them to go further and faster. In fact, I urge the Government to move as quickly as possible towards the use of a single consumer price index. As we recommended in our report, we believe that the Government should eventually choose between a repaired RPI and the updated CPI.

As the noble Lord, Lord Forsyth, explained, there has been no formal response to our report, which was published six months ago. The National Statistician, who retired yesterday, without a proper successor in place, said in March that UKSA would respond in April—and it did, on 30 April, as did the Treasury on the same day. They both said that this was an important issue which required further consideration—in the same words—and that they would respond,

“as soon as it is practicable to do so”.

Not “in due course”, “shortly” or “soon”, which are the usual qualifications, but an entirely unexplained new kind of delay: as soon as it is “practicable” to do so. Can I ask the Minister—well, perhaps not. I wanted to ask what this means. What is making a response impracticable? How long is this impracticability expected to last? We currently have no idea when we might expect the usual formal written response.

So, in the absence of a response, and while the UKSA and the Treasury are considering how to respond, could I ask the Minister a couple of questions? First, does the Minister agree that the ONS has a legal duty to request the repair of RPI? The Minister will know that the Chief Secretary to the Treasury, talking of the proposal to repair RPI, told the committee:

“I am suggesting it is the role of the ONS to put forward that proposal”.

My second question, therefore, is: in light of this, what can be done to avoid this damaging and faintly ridiculous impasse caused by Sir David Norgrove’s assertion that he can read the Chancellor’s mind?

My Lords, I join other noble Lords in congratulating the noble Lord, Lord Forsyth, on securing this debate, on his committee’s report and on his speech, which he delivered in his usual clear and fairly concise manner. I find myself in a state of shock, praising him in such an effusive way. This is not normal, but we do not live in normal times. The two Tory candidates for the role of Prime Minister are in a bidding war to spend public money. They seem keen to overtake the Labour Party on the left. It will all end in tears, and one of the malign manifestations will be—yes—inflation.

The topic of the report is the measurement of inflation, an involved and important topic. It is one that particularly resonates with members of my generation, given the centrality of inflation to political debate and media coverage of the economy during the 1960s and 1970s. We are also, sadly, the generation that tends to have index-linked pensions. I have four, I think, but I have lost track of which is CPI and which is RPI.

The Economic Affairs Committee has done a valuable service in analysing a faulty methodology, concluding that the Office for National Statistics is failing in its statutory duty to provide accurate economic data. The old established measurement, the retail price index, is subject to much criticism in the report. It has, since 2010, showed a wide discrepancy from the consumer price index, with the gap between the two rising from 0.5% to around 0.8%.

This is of the greatest significance in modern times, as the Government have developed a habit of choosing to apply the lower CPI measure when spending money and the higher RPI measure when collecting it. As Martin Lewis, the founder of MoneySavingExpert.com, said:

“Where it costs us more, they use RPI. Where it costs the state, they use CPI. There is no logical justification, it does not make any sense whatsoever. It’s a very simple way of cooking the books”.

The report refers to this practice as inflation-shopping and calls for the use of a single measure of inflation in future.

As I do not want to repeat points made by many other noble Lords, let me briefly cover why that trend is so problematic. Many welfare benefits are subject to the four-year freeze, which we on these Benches continue to find deplorable. For those benefits uprated each year, such as those aimed at disabled people or carers, the increase is capped at the level of CPI. On the other hand, interest on student loans rises by up to RPI plus 3% each year. The House of Commons Library has estimated an additional cost to students of £16,000 over the lifetime of their loan.

Ministers allow regulated rail fares to rise by the rate of RPI each year, although average pay growth has tended to fall below that level in recent years. Meanwhile, the Office of Rail and Road has confirmed that it will transition to CPI for new connection contracts, as with access contracts. This is designed to lower train operators’ costs, but also to cut state subsidy. Alongside this change, the Secretary of State for Transport wrote to rail unions asking them to calculate wage increases by CPI. Despite warm words, there has been no specific pledge that savings will be passed on to commuters.

These examples highlight that an acute aspect of the problem is the Chancellor’s considerable say in the use of different inflation measures. The UK Statistics Authority has admitted that there is a problem with the RPI but has not ordered a correction in the formula because doing so would impact on many UK Government bondholders.

Box 6 of the committee’s report provided a helpful summary of the clearly defined legal duties on the UK Statistics Authority. Section 7 of the Statistics and Registration Service Act 2007 outlines a public interest in the provision of quality official statistics. Section 21 requires the Chancellor to consent to any fundamental change in the inflation index that would be detrimental to gilt investors—something that the UKSI’s chairman did not believe would be forthcoming. However, both the Chief Secretary to the Treasury and the Chancellor said in their evidence that they would be happy to discuss any proposals for change. I put it to Ministers that the general interest in Section 7 should far outweigh the limited interest in Section 21 and that an appropriate response should be to correct the RPI measure incrementally.

The committee was critical of the UK Statistics Authority for its treatment of RPI as a legacy measure, given that it is still widely used, particularly in pay settlements. As the trade unions have outlined, RPI has long existed as the main reference point for pay negotiations. It has been estimated that a general shift to CPI would see the average worker’s salary fall by £350 per year. It would also have a significant impact on pensions.

In March 2018, the Department for Work and Pensions calculated that a switch to CPI on defined benefit pensions would result in,

“a £12,000 reduction in the value of pension income per affected member, on average over their lifetime”.

The Institute and Faculty of Actuaries believes that if a scheme were to change inflation indexes, a 65 year- old man who had been expecting pension increases in line with RPI could expect to receive aggregate lifetime pension payments about 10% to 15% lower.

Where do we go from here? The report notes that, in true “third way” style, the Government, the Bank of England and the UK Statistics Authority increasingly see CPIH, which includes owner-occupiers’ housing costs, as a preferred longer-term measure. However, the committee outlines how CPIH has faced problems since its introduction in 2013. It echoed the views of several witnesses, who raised concerns about the use of rental equivalence in CPIH and called for more work to be done before a single measure of inflation is identified and adopted.

It is clear that the Government are not yet in a position to fulfil the committee’s wish of selecting a single measure, but the proposed five-year timescale identified by the noble Lord, Lord Forsyth, and his colleagues appears sensible. Given the importance of inflation measures for the everyday costs of people up and down the country, I hope the Minister will be able to demonstrate that the Government now have a firmer grip on this issue than was suggested in their evidence to the committee.

My Lords, I thank my noble friend Lord Forsyth for introducing this and all noble Lords who have taken part in an exceptionally well-informed debate on a rather specialised, but none the less important, topic which impacts directly on all of us—as the noble Lord, Lord Darling, and my noble friends Lord Tugendhat and Lady Browning explained. I also thank noble Lords for their detailed report, for which the Government are grateful; I thank, too, the departing members of the committee for their work.

Normally, I look forward to debates on my noble friend’s reports, but on this occasion it cast a small cloud over my weekend, as I realised that what I have to say may leave my noble friend and his committee less than satisfied. However, I hope to persuade him that there are good reasons for that. In fact, much of the debate focused not exclusively on the Government but on the role of the UKSA—particularly the speeches from the noble Lords, Lord Burns and Lord Turnbull. I am sure that they will read with interest what we have said today.

As a former Treasury Minister, albeit some 25 years ago, I took a deep personal interest in the Government’s response, possibly straying from my advertised role as a spokesman for the Treasury. I have read the report, which raises a number of complex and wide-ranging issues on the RPI, the Government’s use of inflation statistics and the future of measuring inflation.

Before I continue, may I first pay tribute to John Pullinger, who recently retired as National Statistician? He had a distinguished term in that post. To mention but a few of his achievements in the role, he led the ONS strategy entitled Better Statistics, Better Decisions, headed the newly created analysis function, and worked alongside the UKSA to, in his own words, make it,

“unacceptable for people to either not use evidence, or to misuse it”,

a sentiment with which I am sure this House concurs—and relevant in view of the exchange earlier today in the Oral Question from the noble Lord, Lord Foulkes.

I should like to address the concerns of my noble friend Lord Forsyth, and the other noble Lords who sit on the Economic Affairs Committee, on the lack of a government response to their report, which was published in January—an issue raised by many noble Lords, including the noble Lord, Lord Sharkey.

The Government appreciate the amount of work and the level of scrutiny that go into all the committee’s inquiries; we understand its frustration. I regret that there is yet to be a government response and understand the difficulties in debating a Select Committee report without one being available. This delay is not driven by inaction. The issues that the report raises are complex and wide-ranging. Measures of inflation are embedded across the economy and affect the lives of almost everyone in the country. They include rental agreements, mobile phone contracts, financial instruments, government debt, pensions and rail fares, to name but a few.

Will the Minister take this opportunity to include wage and salary increases in that list? It seems quite extraordinary that the main quantitative use of the RPI does not get a mention, even now.

I said, “to name but a few”, but I will gladly add the issue raised by the noble Lord to the list. Some, but not all, wage increases are linked to RPI.

Some uses of the measures are interlinked; for example, for pension schemes whose members, many of whom are in private sector defined benefit schemes, have pension payments that increase by RPI. This means that, in turn, those schemes seek RPI-linked assets to hedge those liabilities. As a result, a large share of the Government’s outstanding RPI-linked debt is held by those pension schemes. The Pension Protection Fund estimates that almost 90% of outstanding index-linked gilts are held by UK defined benefit pension schemes and UK insurance companies.

The breadth, complexity, and importance of these issues mean that the committee’s report requires further careful consideration. Given the complexities of the issue, it is sensible that the Government and the UKSA produce a well-considered response—while respecting the UKSA’s independence, of course.

A very kind and polite person from the Chancellor’s office rang me to say that there would not be a response. I said that I was not sure that the House would like that very much, but he said, “Don’t worry, Lord Young will be able to deal with the debate”. The Minister gave a reason the complexities of the system: that so many things rely on the RPI. If that is so, is that not a reason to make sure that the RPI is accurate? I cannot get my head around it.

That goes to one recommendation directed at the UKSA. That issue will be addressed directly in the government response to the recommendations. I cannot give my noble friend an answer today; I hope that he understands why.

In introducing the debate, my noble friend wondered whether the Government discussing this issue with the UKSA somehow compromised the UKSA’s independence. It is perfectly legitimate for the Government to discuss matters with the UKSA without interfering with its independence in decision-making. We discuss a wide range of issues with it—as we should, given that the ONS is the producer of economic statistics. One can have that dialogue without encroaching in any way on the UKSA’s independence. The Government continue to discuss the relevant issues raised by the report; the Chancellor wrote to my noble friend last week, outlining that point. I stress to my noble friend, the noble Lord, Lord Sharkey, and other noble Lords that we are working hard to respond to the committee’s report as quickly as possible. We will communicate a date for this response in due course and will provide sufficient notice for the markets.

Let me move on to the central focus of the inquiry, namely the RPI. As the Government have stated before, we recognise that there are flaws in the way that RPI is measured and that, as a result, its rate of inflation is higher than that of other measures, such as the CPI and CPIH, which is the CPI including owner-occupiers’ housing costs.

The report from the committee is the latest in a series of reports on this intractable issue. I highlight this to stress how complex it is. In 2012, the then National Statistician launched a consultation on potential changes to the RPI following concerns about the increased wedge between RPI and CPI, which had been driven primarily by the 2010 change in the collection of clothing prices. There was then a considerable response, both on matters statistical and non-statistical, and in 2013 the then National Statistician responded, arguing that the RPI did not meet the highest standards expected for a national statistic. That answers the question of the noble Lord, Lord Lea, as to why it was regarded as discredited: the UKSA stripped the RPI of its national statistic status.

However, given its widespread use in the economy, the National Statistician argued that the RPI should remain unchanged. In 2015 a review into consumer price statistics, which had been led by Paul Johnson of the Institute for Fiscal Studies, was published. This also criticised the RPI and recommended that it should be classed as a legacy measure and that its use should be actively discouraged.

Let me explain the Government’s use of inflation statistics and highlight how they have not ignored the criticisms of RPI. Since 2010 the Government have reduced their use of RPI. They have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. More recently—this addresses the accusation of index shopping made by a number of noble Lords—in April 2018 the Government brought forward switching the indexation of business rates from RPI to CPI.

Did the Minister say that the state pension was linked to CPI? I thought it was triple-locked—I hope it is because I draw it.

My understanding of this part of my income is that it is the greater of CPI, RPI or, I think, 2.5%.

We have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. If that is wrong, I am sure a signal will come from the far end of the Chamber to put it right before I sit down.

I was dealing with the issue of index shopping and said that in April last year we brought forward switching the indexation of business rates from RPI to CPI. This move is expected to save businesses almost £6 billion over the next five years—at, of course, a cost to the public purse.

At Budget 2018 we outlined our policy on inflation statistics. Specifically on RPI, the Government committed to not introducing new uses of RPI and to reduce its existing uses when and where practicable. I note that the report encourages the Government to move all uses to CPI. However, the matter of practicability is key and further moves away would be complex. It has not been clear in recent years which measure of inflation it would be appropriate to use, although that picture is now getting clearer.

One sizeable area where RPI is used is in the Government’s index-linked gilts—a number of noble Lords mentioned this, including my noble friend Lady Browning— which are indexed to RPI. The Government have no plans to stop issuing index-linked gilts indexed to RPI. As the demand for RPI-linked debt is vast in comparison to CPI, particularly from the pensions sector—the largest holder of gilts by sector—the taxpayer gets far better value for money issuing into this market. Until such time as we can be satisfied that there would be sufficient demand for a new debt instrument, and that it would deliver better value for money, we will continue to issue RPI-linked gilts.

As mentioned by the noble Lord, Lord Macpherson, demand for CPI-linked debt is growing. However, given that demand for RPI-linked debt is stronger, the Debt Management Office gets better value for money by continuing to meet this demand. However, in response to the noble Lord, Lord Macpherson, the issuance of new debt instruments is kept under review.

On the Government’s future use of inflation statistics, particularly in relation to CPIH, noble Lords have raised concerns over its suitability as a headline measure for the Government. Again, I pay tribute to the work of the ONS, led by John Pullinger. CPIH has undergone extensive development, choosing between different methodologies where necessary, and rigorous testing by the independent Office for National Statistics. This robust process has led to CPIH being approved as a national statistic, meaning that it is fully compliant with its code of practice for statistics. The Office for Statistics Regulation recommended to the board of the UKSA that CPIH be granted national statistic status, which is the highest kitemark of quality in our statistical system. Following this extensive development, at Budget 2018 the Government stated that their objective was for CPIH to become their headline measure over time.

The Government have not, however, set a date for CPIH to become their headline measure of inflation. This is because CPIH is a relatively new measure—a number of noble Lords touched on the issue of housing. CPIH has only recently been certified a national statistic, and it was only late last year that an updated historical back series was published, extending the series. With this back series in hand, work is now ongoing to understand its properties compared to CPI and RPI. The Government will regularly update Parliament on their progress towards using CPIH and, of course, on their broader strategy on inflation statistics.

Perhaps I may touch on some of the issues raised in the debate. The noble Lord, Lord Tunnicliffe, raised the benefits freeze. The decision to freeze most working-age benefits from 2016-17 was one of a number of difficult decisions that the coalition Government took to put the public finances back on track. We have no plans to repeat the freeze and we expect working-age benefits to rise with inflation from April next year.

The noble Lord, Lord Tunnicliffe, mentioned Sections 7 and 21 of the Statistics and Registration Service Act. Other noble Lords also mentioned the issue—the noble Lord, Lord Turnbull, in particular. We recognise the committee’s view on this and the Government will respond to the report in due course and on that specific recommendation. Changes to RPI are a matter for the independent UK Statistics Authority and the Office for National Statistics. That is a response to the suggestion that RPI could be incrementally corrected.

In conclusion, I recognise that I have not been able to go as far as noble Lords would have wished. The Government note that this report covers complex and wide-ranging issues, and makes a number of serious and sober recommendations to both the Government and the UKSA. Given the extensive use of RPI in the economy, the complex nature of some of those uses and their interactions, and, most importantly, the effect on people and the economy, the Government believe that it is necessary to take time to consider the committee’s report carefully before responding.

The Government recognise that RPI is a flawed statistic, and stress that they have not avoided acting on the issue. They recognise that further work must be done, but note that further moves away from RPI are complex. Further, the necessary work to prepare for CPIH is yet to be completed. I say to the noble Lord, Lord Sharkey, that the Government will respond as soon as practicable to noble Lords’ report and are working extremely hard so to do.

Finally, I will convey to the Chancellor the sense of frustration expressed by my noble friend Lord Forsyth and others about the time it has taken to respond to the report. I will personally relay that message.

My Lords, I thank everyone who took part in the debate, and my noble friend for that excellent reply. He is a sort of Kate Adie of the Treasury at the moment, deployed in difficult circumstances to report on what is going on at the front. It is the second occasion on which he has responded to an Economic Affairs Committee report—the previous one was on digital tax—where every speech has been in support of the committee’s report and he has had to explain why the Treasury is not responding in the way we would like. On this occasion he has not actually ruled out doing something and we await a response with bated breath.

It is a complex matter—we in the committee had to put some hot towels on our heads. But members of the committee are reasonably bright and we were able to come up with some clear recommendations. We look forward to when the Chancellor of the Exchequer is before the committee later this year and hope that by then there will be a response. This is a complex subject, but the ordinary layman might find it very difficult to understand why, as my noble friend said, RPI is important in a range of areas in our economy and therefore it is necessary for us to continue with an RPI that everybody accepts is flawed. That is a very difficult proposition to accept.

The other matter that is very clear is that the debate has focused, quite rightly, on the degree of independence of the statistical authorities. Perhaps it is really for another place to consider whether it is right that the appointments to that body are made by the Government rather than by the House of Commons or by Parliament as a whole—but here I am broadening the debate.

I shall say a couple of words about the excellent speeches that have been made. I thank the noble Lord, Lord Turnbull, for his speech and for his enormous contribution to the Economic Affairs Committee, not least in persuading me that we need to build more social housing and to remove the cap on local authority borrowing. I am delighted to say that on that occasion the Treasury accepted our recommendation.

We are also losing the noble Lord, Lord Sharkey, from the committee. He has made a formidable contribution. It has been a great pleasure for me to chair the committee with such fine brains, including those who spoke on behalf of the committee in this debate—that is, my noble friend Lord Tugendhat and the noble Lord, Lord Burns. I am very disappointed that we have not been able to recruit the noble Lord, Lord Macpherson, to the committee, because having such experienced Treasury people endorsing our reports must make it extremely difficult for people such as my noble friend to respond to them.

Having taken my noble friend’s assurances that he will have a word with the Chancellor, that the Treasury will get on with responding and that the statistics authorities will read this debate and see the strength of feeling that has been expressed on all sides, I beg to move.

Motion agreed.