Government sticks with 'widely discredited' inflation measure

by Edmund Greaves from Moneywise |

Chancellor Sajid Javid has decided not to act on recommendations to change the Retail Price Index (RPI) measure of inflation, leaving consumers to face unfair price hikes.

The Chancellor has decided not to tamper with RPI as it is too "embedded" in the UK economy.

The RPI measure of inflation is widely discredited as inaccurate, and has since been superseded by both Consumer Price Index (CPI) and Consumer Price Index including Housing costs (CPIH) as more accurate measures of inflation by the UK Statistical Authority (UKSA) and the Office for National Statistics (ONS).

The Chancellor considered, but refused two recommendations from UKSA. Firstly, to abolish RPI altogether and cease publication. Or secondly, to change how RPI is measured to align it with the more accurate CPIH.

Unfortunately, Mr Javid declined both suggestions saying it could be "damaging to the economy and the public finances."

However, the Chancellor has committed to a review of RPI after a public consultation to better understand its uses, and potentially make changes between 2025 and 2030 with a view to potentially aligning RPI with CPIH. 

Sir David Norgrove, chair of the UKSA, comments: "We have been clear that the RPI is not a good measure, at times significantly overestimating inflation and at other times underestimating it, and have consistently urged all – in government and the private sector – to stop using it. However, the RPI is unique as we need consent from the Chancellor to make certain changes, such as the one we have proposed.

"Although we regret that no change will occur before 2025, we welcome the Chancellor's intention to consult on resolving current issues with the RPI.

"We continue to urge the government and others to cease to use the RPI. It would be wrong for the government to continue to use a measure of inflation, which it itself accepts is flawed, where it has the opportunity to change."

RPI is used in a wide variety of ways and has especially come under criticism as many businesses use the measure to raise their prices. It is particularly hard on consumers who pay for such products and services as the RPI measure tends to be higher than both CPI and CPIH.

For instance, train firms annually raise their fares based on RPI. This leads to actual inflation-busting fare increases. In August this year, it was announced rail fares would increase by 2.8% in line with RPI measure on 14 August. 

This is much higher than the most accurate inflation measure, CPIH, which measured a rate of inflation of just 2% in the latest update.

In other industries, such as mobile phone and broadband, RPI is often used in the same way to deliver above real inflation price increases for consumers. 

RPI is also used as a reference index for some government debt.

This article was originally published in our sister magazine Moneywise. Click here to subscribe.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

get more news and expert articles direct to your inbox
Sign up for a free research account and get the latest news and discussion, and create your own Virtual Portfolio