The Chancellor is set to take about one-third off future income growth of all those with RPI-linked pensions when he sanctions the death of the Retail Prices Index in the spending review next week.
Yes, the Chancellor will, for no good reason, get rid of the UK’s longest-standing statistic that plays a legal role in so many people’s lives.
Books will be written about this government-sponsored statistical vandalism that started 10 years ago when the Office for National Statistics (ONS) made a stupid error in its calculation of the RPI. Rather than correct it, it embraced institutional indecision leading to this shameful situation.
When I say that the Chancellor will sign off a proposal to get rid of the RPI, in fact he will do something worse: rename the CPIH index as the RPI, while suppressing the real RPI. This is such a shabby makeover it’s borderline fraudulent.
Indeed, in many walks of life such action would be illegal. Can you even imagine a car dealer selling you a Toyota that was really a Honda? Yet the ONS and Treasury together will be telling us that the RPI of the future will be the CPIH and not the RPI.
In the same way that many cars look the same to many people, the Treasury and ONS are hoping that most people will not notice that the RPI is no longer the RPI.
But the CPIH and RPI are constructed in different ways and they deliver different results for different purposes – CPIH for macroeconomic measurement and RPI for the impact on a typical household.
The annual rate of RPI inflation is usually one percentage point higher than the CPIH. This will hit the returns from pensions or investments that are uprated by the RPI.
One percentage point a year makes a difference. Someone aged 60 retiring on a pension of 100 would, if that were to be uprated by the real RPI, have an income of 180 by the time they are 80 years old. Under the new version of RPI the uprating will be less, to about 150 in 20 years’ time - roughly a fifth lower.
The move will no doubt be presented as something trivial and technical. Yet it is happening without a consultation and is likely to leave the Government open to legal challenges.
These will come from pension funds (fighting on behalf of their pensioners), from investors in index-linked bonds (who will see their expected returns fall) and from others who have commercial contracts based on RPI.
The somewhat sneaky way of reducing investor returns is unlikely to improve the UK’s standing in financial markets where the rating is already below the US, Germany, France and many other leading countries. It seems odd to add another doubt about the UK’s probity when the Government has so many bonds to shift.
The ONS’s action, which flies in the face of recommendations from committees in the House of Lords and the Commons, will cause grief for very little benefit.
It would have been a trivial task for the statisticians to refresh the various measures of inflation to make them all more fit for purpose. Sadly the ONS seems to lack the honesty and professionalism to correct its original error. Their actions break the spirit if not the letter of law designed to protect the RPI.
Worse, the checks and balances in the country’s statistical system meant to stop such a foolhardy move compounding that of a decade ago seem to have failed. So far as we can tell, both the current national statistician and the Office for Statistics Regulation have been silent on the topic.
If the move is justified then these two key statutory statistical advisers ought to be arguing the case. Instead we are left wondering why they are turning a blind eye.
The political pressure to get rid of the (higher) RPI probably reflects a Treasury or Bank of England desire to eradicate anything but the lowest rates of inflation. It’s unlikely that the Treasury or Bank of England have looked closely at the issue and there’s no evidence that they have.
There’s a Brexit sting in the tail too. The plan to eradicate the RPI was cooked up when Philip Hammond was chancellor and Mark Carney was Bank of England governor. The CPIH derives from the EU’s system of constructing inflation measures, unlike the RPI, which has been honed over decades to suit British needs.
The current leadership should see the risks of tethering the UK’s measure of inflation to a set of definitions controlled by the EU’s Luxembourg-based statistocrats.