The U.K.’s decision to create an extra measure of inflation will sow confusion and lead the government and lobby groups to pick the index that best suits their needs, analysts and executives said.
Statisticians will stick with the way the retail-price index is calculated while adding a new measure -- RPIJ -- that is more closely aligned with international standards, the U.K.’s statistics office announced yesterday. The new index, along with previously announced plans to create a gauge that includes housing costs called CPIH, will take the number of inflation indexes to nine.
“There is inflation in the amount of inflation measures,” said Erik Britton, a director at Fathom Financial Consulting in London. “I don’t see what the point is of publishing RPI which you have admitted isn’t fit for purpose and introduce a new measure that may not get used.”
The Consumer Prices Advisory Committee started examining the calculations that underpin the RPI after statisticians noted a widening difference between it and the consumer-price index, the basis on which the Bank of England sets monetary policy, due to differences in the mathematical formulae used to calculate price changes. Annual RPI inflation stood at 3 percent last month, while CPI inflation was 2.7 percent.
A change to the formula would have required an assessment by the Bank of England and possibly the approval of Chancellor of the Exchequer George Osborne. It threatened to reduce government payments to investors in the 290 billion-pound ($468 billion) index-linked gilt market at a time when Osborne has stressed the need to retain market confidence to keep interest rates low.
“We really cannot see the point of introducing the new RPIJ measure,” said Michael Saunders, chief European economist at Citigroup Inc. in London. “Nothing will be linked to the new RPIJ measure: index-linked government debt will continue to be linked to the existing RPI, as will private-sector pensions and other contracts that are RPI-linked. The inflation target will continue to be set in terms of the CPI.”
Yesterday’s decision equates with option one of four proposed by National Statistician Jil Matheson last year and follows a two-year assessment of the index. The RPI has “significant value” for investors, she said. The U.K. Treasury said it will continue to issue debt linked to the RPI and consider further implications of the announcement “in due course.”
“The current RPI -- and we are signaling the current weaknesses in it -- is very widely used,” Matheson told reporters in London. “We are balancing the need for continuing the index with getting a new internationally benchmarked methods series.”
Away from financial markets, others were also critical of today’s decision. Nigel Green, chief executive officer of deVere Group, a financial-consulting firm, said pensioners may be hurt by the introduction of a new gauge.
“We suspect that the decision not to effectively reduce RPI is now likely to accelerate the number of pension schemes which will switch indexation from RPI to CPI,” he said in an e-mailed statement.
Ros Altmann, director general of Saga, a group that provides services to pensioners, welcomed the announcement, saying Matheson had been right to listen to concerns over dropping the RPI measure. Still, it’s “not ideal to have yet another inflation measure,” she said in a telephone interview.