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The UK’s Office for National Statistics, ONS, has announced that it will not change the method by which the Retail Price Index, RPI, is calculated.
Following a three month consultation the ONS has chosen to not change the RPI to be more in line with the consumer prices index, but said that an additional price index for inflation would be established.
The decision to create the new index was reached after the ONS consultation showed that the RPI does not currently meet international standards, necessitating the need for a new index.
The new index, the RPIJ, will start in March will use the Jevon geometric formulation to calculate its figures, instead of the now outdated Carli index.
Commenting on the decisions the ONS’s National Statistician Jil Matheson said that 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”.
The UK Government will continue to use the RPI as the measure for calculating the return on old and new index-linked bonds, with the Treasury’s Economic Secretary, Sajid Javid MP, stating that for “gilt investors, future cash flows on existing index-linked gilts will continue to be calculated by reference to RPI” and that the government will continue issuing RPI index-linked gilts .
The decision has been welcomed by Joanne Segars of the National Association of Pension Funds, who commented that “Pension funds are relieved that RPI has been left intact because rewiring this crucial measure would have created upheaval for both inflation-linked pension fund investments, and the income of current and future pensioners.
“Reworking RPI would have given many pension funds some much-needed breathing space” and that a “pensioner with an average RPI-linked final salary pension of £7,600 could have seen a £20,000 fall in their income over a 20-year retirement.”
Caution was raised by the Royal Statistical Society, who argued that “simply replacing the arithmetic Carli formula with the geometric Jevons formula, as will happen in RPIJ, is not optimal” and that “The formula effect generally, and particularly in the case of clothing, is dependent not just on the choice of index but also on the characteristics of the price movements and levels being measured, sample design, choice of base period and price collection methods”.
