Finally. I have spent six, often lonely, years of campaigning against Britain’s dysfunctional inflation statistics and there now seems a decent chance of resolving the problem.
My sense of optimism stems not from a change of heart at the Office for National Statistics, which produces the data, nor from its lenient regulator, the UK Statistics Authority.
Instead, the outlook improved after the publication on Thursday of a damning report by a high-powered House of Lords committee, whose members include two former chancellors, a former cabinet secretary and the former top officials in the Treasury and Foreign Office.
Let’s quickly recap the issue. Britain has long had competing measures of inflation, most notably the retail price index, which has a long history and is used to calculate the intereston inflation-linked government bonds, among other things. It has also had the consumer price index, which has been used as the Bank of England’s inflation target.
Anyone who had more than a hazy understanding of inflation understood that RPI was generally about 0.5 percentage points higher than CPI and much of this gap was due to arcane formulas built into the calculation of the two measures.
These two indices coexisted with only minor discomfort for many years. But everything changed in 2010 when the ONS revamped the way it collected clothing prices in both series. Even though the same prices from the same shops are used in both the RPI and the CPI, the way a wider sample of clothing prices was collected interacted in an absurd way with the RPI formula.
It pushed up that measure of inflation, almost doubling the gap between it and the CPI. With £233bn of RPI-linked government bonds outstanding in 2010 when the change was made, the 0.4 percentage point rise in the RPI has cost taxpayers £1bn a year.
The fact that the authorities introduced a change costing billions without understanding its likely effects should have been quite a scandal. (Full disclosure: at the time I sat on an expert advisory panel and no one had any inkling that the change in clothing collection techniques would have any significant effects.)
But it is far worse that when the advisory panel attempted to resolve the mess in 2012, the ONS bottled out, preferring to avoid annoying bondholders to producing good statistics.
When the advisory panel attempted to resolve the mess in 2012, the ONS bottled out, preferring to avoid annoying bondholders
As a member of the advisory group, I vividly remember being told of the ONS’s 2012 decision before it was published. A mistake that could have cost £2bn turned into a disgraceful £6bn waste of taxpayers money because the ONS rejected the advisory committee’s recommendations.
Ever since, the ONS and UKSA have constructed an edifice of excuses for failing to act. The UKSA has been candid in admitting the RPI is a bad measure of inflation, but refuses to do anything about it.
In my view, it has disregarded its statutory duty to promote and safeguard the quality of official statistics such as the RPI. The Lords’ committee appears to agree: the report concludes that the position of the UKSA is “untenable”. It recommends immediately reversing the 2010 clothing price collection decision. Then, over time, it suggests establishing an agreed measure of inflation and bringing the RPI into line with that.
You cannot abolish the RPI because it is hard-wired into legislation and multiple contracts worth hundreds of billions of pounds. The conclusions are wise and would resolve this affair.
This is a devastating rejection of official policy regarding Britain’s most important official statistic — the only one that is specifically mentioned in primary legislation. The UKSA board must move and implement the Lords’ recommendations in full. It is time to put the RPI scandal to bed.
chris.giles@ft.com