Governments are using the figures that suit them rather than seeking an accurate set of numbersby Anita Charlesworth and Adam Tinson / September 17, 2019 / Leave a comment
Borrowing from Oscar Wilde, economists are often accused of “knowing the price of everything, and the value of nothing.”
In fact, it turns out that in the 21st century, knowing the price of everything is harder than it seems. At least when it comes to the key things necessary to measure the rate of inflation. We don’t all buy the same things, and with technological change, products improve over time, so a mobile phone today is not the same as a mobile phone 10 years ago. Inflation measures affect vast swathes of our lives; determining pay, pension and benefit rises, school and hospital budget increases, the interest rates set by the Bank of England and the cost of government borrowing. Getting the measure or measures right matters, not least as it has implications for our health and standard of living.
For a dry set of indices, concern over the right measure of inflation has generated a lot of heat in recent years. This debate centres on the continued use of the flawed Retail Price Index (RPI) informing some government policies and the problems caused by having multiple indices. In the summer, the House of Lords Economic Affairs committee recommended the use of a single measure to avoid confusion and reduce government “inflation index shopping”—the practice of choosing the inflation measure that best suits the wider objectives of a particular government. In the chancellor’s Spending Review earlier this month he agreed to phase out RPI but no sooner than 2025.
Inflation shopping is a real issue; the Consumer Price Index (CPI) measure of inflation has tended to be lower than RPI. It’s perhaps no surprise that over recent years the government has switched to CPI where it favours the financial position—benefits uprating and public sector pensions have been switched to CPI. Elsewhere they’ve stuck to RPI—rail fare increases and student loan interest are cases in point. The House of Lords Committee is right: the measure should fit the purpose, not political expediency.
The chancellor is right to phase out RPI—the Office for National Statistics (ONS) reports that there is an error in the way price rises are calculated which means that it’s biased upwards. But any single measure oversimplifies. The business of government is complex and people are not homogeneous. From a health perspective, there are two key issues where measuring inflation appropriately really matters.
The first relates…