MPs and peers ramp up call to fix flawed inflation measure

MPs and peers ramp up call to fix flawed inflation measure

Reuters  | Feb 12, 2019 12:19

MPs and peers ramp up call to fix flawed inflation measure

By David Milliken

LONDON (Reuters) - British lawmakers stepped up calls to lower an outdated inflation measure used for repayments of government bonds, which could reduce payments to investors by £1 billion a year.

Inflation-linked bond prices hit a six-day low after lawmakers told statisticians to seek approval from the finance ministry to make the change to the way the Retail Prices Index (RPI) is calculated.

The economic affairs committee of Britain's upper house of parliament said last month that errors in the formula to calculate RPI accounted for 0.3 percentage points of the 0.8 percentage points by which it typically exceeds the newer measure of consumer price inflation (CPI).

The UK Statistics Authority (UKSA) has said since 2013 that RPI - which is also used to determine repayments of student loans and annual increases in rail fares - is no longer fit for purpose and advised the use of other measures such as CPI.

But to change RPI, the authority needs permission from the finance ministry. The UKSA has said it is reluctant to seek the change which it believes would probably be rejected.

Problems with RPI have been known for years - and have been factored into the price investors paid at auction for more recent issues of inflation-linked debt - so changing the formula now could leave bondholders feeling short-changed.

Legal action against Britain's government is possible from holders of some older inflation-linked bonds if the RPI formula changes significantly.

Nonetheless, two committees from the upper and lower houses of parliament jointly said on Tuesday it was time for statisticians to ask finance minister Philip Hammond for permission to change RPI.

"The Committee has previously urged the Government to abandon the use of RPI.... Failing this, the Chancellor should at least consent to UKSA correcting the known errors in the RPI formula," Nicky Morgan, chair of the House of Commons' Treasury Committee, said.

A finance ministry spokeswoman said the government was moving away from RPI where possible, but that in some cases this would be "complex and potentially costly".

"The government's objective is that CPIH will become its headline measure over time and that it will reduce the use of RPI when and where practicable," she added.

CPIH is a newer version of CPI that includes a greater range of homeowners' housing costs, but which is not yet widely used.

© Reuters. FILE PHOTO: People shop at a Sainsbury's store in London

The finance ministry has just over a month longer to respond to last month's House of Lords report into RPI and other inflation measures, and is due to announce annual bond issuance plans on March 13 alongside a mid-year fiscal statement.

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