Today the Economic Affairs Committee of the House of Lords issued their report on ‘Measuring Inflation’. The context was a challenging one, not least given the massive importance of inflation measurement.
The two main measurements of inflation, RPI and CPI have subtle differences that will make a big difference to pay, pension, contracts, welfare and taxes – basically every way that working people interact with the economy. Unions favour RPI as a measurement that more closely matches the public’s experience, and argued this strongly to the committee.
We’re concerned that over recent years the government and UK Statistics Authority (the stats watchdog UKSA) have intentionally sidelined RPI in favour of methods that show lower headline inflation.
We have been dealing with an alphabet soup of measures (table A in the ONS press release is headed ‘CPIH, CPI, RPI, RPIX, CPI-CT & CPIHY), controversial practical and theoretical decisions, and a government determined to use the disarray to rip off the public.
The report is remarkable for the bold way it upends the status quo. The Committee junks much of what UKSA and the Office for National Statistics (ONS) have been up to on inflation measurement in recent years. The UKSA has basically failed in its “statutory duty to promote and safeguard the quality of official statistics” (p. 3).
The final destination is, however, unknown. Maybe reading between the lines there are causes for concern, but on a positive reading there is here the opportunity to find a sensible way forward.
First – and above all – the RPI is vindicated:
12. We disagree with the UK Statistics Authority that RPI does not have the potential to become a good measure of inflation. With the improvements to RPI that we set out in the previous chapter … we believe RPI would be a viable candidate for the single general measure of inflation.
The Committee effectively dismiss toxic notions around letting the RPI ‘wither on the vine’ that have been heard in the recent debate, and ask that the “[4.] … programme of periodic methodological improvements be resumed”. This should include an “attempt to fix the issue with clothing prices” which “would be expected to lower RPI inflation” likely by around 0.3 percentage points (para 113).
Second – to reiterate – the Committee calls for:
one measure of general inflation that is used by the government for all purposes.
While recognising the place for different measures of inflation for different purposes (not least inflation targeting versus uprating welfare payments), the judgment seems to be that public confidence is best served by a single measure.
Third, CPIH is rejected:
13. We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.
CPIH dominates ONS reporting of inflation, but nobody looks at it. The ONS hoped it would become widely used as the #1 measure of inflation. With the chosen (and controversial) approach for housing rejected, the index becomes worthless.
Fourth, all uprating should be switched temporarily to the CPI:
While the single general measure is being determined, the Government should switch to CPI for uprating purposes in all areas where it is not bound by contract to use RPI.
(Student loans are excepted, given their earlier recommendations for a reduction in the rate of interest.) This at least would stop the RPI rip-off where workers pay RPI and get CPI, though paying and receiving RPI might have been preferential. Either way though, this is likely to be incredibly complicated, even if well-intentioned.
On a technical level the ‘single measure’ is the most important but also the most challenging recommendation. Many users – above all, the Royal Statistical Society – are worried about not having different measures for different purposes.
From a workers’ point of view the main worry is likely to be that having rehabilitated the RPI it is still eventually dropped in favour of the CPI.
But the logic of the report does not make this an inevitability. Much turns as always on the formula debate that means the RPI comes in higher than the CPI.
The Lords recognise that “expert opinion … differs” [recommendation 1]. They find consensus that there is a problem with clothing (i.e. the RPI is overstated because clothing is overstated), but are “not in a position to reach a conclusion” on whether the same problems go beyond clothing [recommendation 3].
They fear that the formula effect “may be a perpetual debate” [3.], but this should not be the case. It seems to me that those who oppose the RPI prefer to engage with tired old theoretical arguments (paras 80-86) rather than with the actual evidence of using different formulae over the past 20 years. The report should trigger an impartial and wide ranging programme of work to understand this experience better and find a coherent way forward. (Before recent controversies the ONS used to have a well-respected work programme that could easily be restored.)
Pleasingly the Lords quote me on the “groupthink” that I have encountered through involvement in this process (para. 105). Let us hope that the report bring this to an end and points towards an impartial and sound solution that commands widespread support.