By Rebecca Burn-Callander Thursday, 10 January 2013

No change to calculation of RPI SHOCKER!

RPI and CPI will stay the same, but a (slightly) new index will be introduced, says the ONS. If inflation rate setting were a dramaturgical event, the play would have abruptly ended just as a RPI's non-identical twin entered stage left.

Retail price index (RPI) calculation will not be overhauled, the ONS revealed today. After three months of deliberation, procrastination and negotiation, that is its final word on the subject.

The National Statistician, Jil Matheson, says of the ONS’ decision: ‘There is significant value to users in maintaining the continuity of the existing RPI's long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds.’ That ‘value’ was clearly demonstrated by the 406 people and organisations who wrote in to vote on the change; 332 were staunchly against it, although only 64 actually explained why...  

The disparity between RPI and CPI runs at an average of 1.2 percentage points a year, mostly down to the ‘formula effect’ – a result of using slightly different ways of working out the average cost of goods and services in any given economy. This is explained concisely in a way that will not make your head explode here by MT deputy editor Andrew Saunders.  

The original plan was to bring RPI more in line with its sister inflationary measure, CPI (which excludes housing costs) and generally simplify the whole process of working out the cost of living. At the moment, RPI uses what’s knows as the Carli Index, which is an ‘upward bias’ factored in to the equation that adds nearly 1% a year. The UK is the only country in the developed world that still uses Carli.

Stripping Carli (economic smut, if ever we’ve heard it) out would have generated an estimated £2.5-3bn for public coffers as taxpayers would no longer be funding protection against inflation on bonds that probably overstate the true rate. Osborne will now be digging down the back of the sofa for those billions. A statement from Barclays, reacting to the decision, reads: ‘Inflation-linked markets will be marked substantially richer on this morning’s news.’

And, instead of making all this much easier to understand, the ONS has decided to add a third, slightly different index to the existing RPI/CPI family. The inflationary triumvirate is born.

Confused? Well, from March 2013, the ONS will now publish a new version of the RPI alongside the existing one. It’s RPI as we know it, Jim, but calculated using the CPI formula.

This third index will usually rise more slowly than RPI, which could influence the future pension increases of private sector pensioners (should their insurers prefer to adopt RP12, although they probably won’t). It could also reduce the amount earned by investors in index-linked government bonds and savers with index-linked savings certificates.

Curtain falls. Taxpayers boo. The rich cry, ‘Bravo!’

Image: BigStockPhoto (businessman flying on ballon)

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