Official statistics watchdog rebuked by House of Lords Committee over Retail Price Index reform failure

The committee, which includes two former Chancellors and senior Treasury officials, said the stance of the UK Statistics Authority was 'untenable'

The problem in the RPI relates to a flawed formula and its interaction with the collection of the prices of women's tops (AFP/Getty)

The UK’s official statistics watchdog has been rebuked by a heavyweight House of Lords committee for failing to do its job of safeguarding the quality of the UK’s inflation data.

A report from the Lords’ Economic Affairs Committee criticised the failure of the UK Statistics Authority, over the past eight years, to correct well-known problems in the calculation of the Retail Prices Index (RPI).

“The Authority has a statutory duty to promote and safeguard the quality of official statistics. This includes ensuring the accuracy of official statistics. But despite these responsibilities, the Authority has refused repeatedly to correct the problem,” the committee said.

Since 2010, when there was a change in the way clothing prices were averaged, there has been an 0.8 per cent gap, on average, between the annual rate of RPI inflation and the growth of the Consumer Price Index, up from 0.5 per cent previously.

The majority of experts agree that the RPI is upwardly biased.

The UK Statistics Authority, which was formed in 2008, says the reason it has not ordered the Office for National Statistics, which it oversees, to reform the way it calculates RPI is because this would impact many UK Government bond holders, whose payments are linked to RPI, and any reform would require the approval of the Chancellor of the Exchequer.

The chair of the Authority, Sir David Norgrove, informed the committee in his testimony that there was no point doing so because he expected the Chancellor would simply refuse and that it would be a more productive use of his time to put pressure on ministers to stop using the RPI for regulated prices and to use the Consumer Price Index (CPI) instead.

But the committee, which includes two former Chancellors and senior Treasury officials, said this stance was “untenable”.

“Rather than pre-empting the decision of the Chancellor, it should fulfil its statutory duty to promote and safeguard the quality of official statistics and to do that, it should request a fix to the clothing problem,” it said.

“The Chancellor should approve this change regardless of the effects on index-linked gilt holders, holders of which before 2010 received an unwarranted windfall.”

The RPI’s status as a “national statistic” was revoked in 2013, but the ONS continues to compile it because it is required to do so by legislation. The index is used as a benchmark for £435bn of inflation-linked government bonds.

It is also used in the calculation of student loan interest and increases in train fares.

The problem in the RPI relates to a flawed formula and its interaction with a change in the collection of the prices of women’s tops.

It has been estimated that around £1bn a year in excess interest is paid to bond investors by taxpayers due to the 2010 RPI change.

But in other areas the Government has been accused of “inflation shopping” for its own benefit.

The chairman of the Lords committee, Michael Forsyth, said: “When the government gives money to people it is generally opting to adjust payments for inflation using the CPI. But when it takes money from people, it is generally opting to use the RPI, which has been around 1 per cent higher than CPI in recent years. This simply is not fair.”

In response to the Lords committee’s report, the UK Statistics Authority said it agreed that the RPI had “significant shortcomings” and it would “continue to work closely with our counterparts in government and at the Bank of England and respond to the committee”.

The most recent data shows CPI inflation at 2.1 per cent in December 2018 and RPI inflation at 2.7 per cent.