Anthony Hilton: The retail price index is flawed but tinkering with it could be costly

A bout the only government statistic that has any direct bearing on people's lives is the inflation number. The others – growth, unemployment, retail sales, investment – have relevance but they don't directly affect the purse and wallet the way the inflation number can through its direct link to benefits, pensions, pay agreements and a lot more.

We should therefore all be interested in the debate that is under way to change the way the retail price index is calculated. The problem with the current approach is that if one of the measured items increases in price, it will push up the index, as it should. But if 12 months later, the price of the offending item has fallen back to its original level, it will not pull the index back down by the exact same amount that it pushed it up in the first place. As a result, the critics say, there is an upward bias in the RPI, and it exaggerates the inflation in the economy.

The statisticians have a point, but this is more than just a matter of academic or mathematical purity. The measure may be flawed but it has the advantage of familiarity, and it is trusted for what it is. The fact is that few people actually experience the RPI level of inflation, just as few – or in this case no – households have the national average of 1.7 children. Young people going to university currently experience a massively higher level because of tuition fees. Saga, the organisation for the over-50s, says every month that pensioner inflation is also much higher than the RPI because the elderly spend proportionately more on food and heating and less on iPods and clothes.

But the real problem is that no one trusts the Government's motives, even though this is not primarily its initiative, because too often and for too long ministers have played fast and loose with statistics for their own purposes.

Government has never seemed worried by these methodological flaws in the past, and the suspicion is that this is just a convenient way for them to cut the rate of inflation and thereby reduce all the payments they have to make which are linked to it.

This is the fear in the City, where fund managers responsible for the investments of insurance companies and pension funds have huge holdings of index-linked government stock, where the rate of interest paid is directly linked to the RPI.

A downward shift in the index would mean a fall in the income these funds receive, not just this year but for the full life of the bonds, which in some cases is 50 years. So it is no surprise to hear, as I did earlier this week, that the Association of British Insurers – responsible for billions of pounds of the nation's savings – has written to the Government explaining why it thinks RPI reform is a seriously bad idea.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Claims Administrator

£16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

£50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

Recruitment Genius: Security Officer

£16500 per annum: Recruitment Genius: Applicants must hold a valid SIA Door Su...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss