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Business Comment

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.