This flawed statistic benefits a lucky few while the rest of us pay the priceby Paul Johnson / February 27, 2019 / Leave a comment
Segal’s law tells us that a man with one watch knows what time it is. A man with two watches is never sure.
When it comes to knowing what’s happening to inflation we are like a man with three watches. The UK Statistics Authority publishes three headline inflation measures every month. One is the Consumer Price Index, the CPI, which is the measure targeted by the Bank of England and the measure generally reported by the media. A version of it, CPIH, takes account of owner occupiers’ housing costs and is the one that the statisticians would like us to use. But it is of relatively recent vintage and hasn’t really caught on yet.
The third is the Retail Price Index, the RPI. This is much the most venerable of the measures, with a heritage dating back many decades. It is used by the government in calculating repayments on student loans, for increasing rail fares, and most importantly as the inflation measure which determines the returns on index linked gilts. It is also used extensively as the basis for annual increases to private sector occupational pensions in payment. Unfortunately it is wrong. This watch is almost always fast. There is a mistake in the way it is constructed. This mistake started to have a bigger effect after 2010—the watch got faster. Before 2010 the RPI ran at about 0.5 per cent above the CPI on average. Since then it has been running about 0.8 per cent a year above the CPI. That additional gap reflects an error in the RPI.
Don’t take my word for it. The UK Statistics Authority itself has said that the RPI is flawed, stripped it of its National Statistics kitemark, and encouraged users to move away from it. Yet they continue to publish it. Not surprisingly this has drawn some criticism. Most recently the House of Lords economic affairs committee published a sharply critical report suggesting that the flaws be corrected. The chair of that committee Lord Forsyth joined forces with Nicky Morgan, chair of the Treasury Select Committee, in writing to the Statistics Authority to say that its position of maintaining the current RPI as a “legacy measure” is untenable.
The problem arises right in the bowels of the calculation process. The RPI has probably always been upwardly biased. The issue though was exacerbated…