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Calculating UK inflation: Common Sense or Common Theft

Brian Sturgess - December 2012

The Office of National Statistics (ONS) plans to launch a new Retail Price Index (RPI) known as the RPIJ (RPI Jevons) following a decision to implement a new eponymous averaging formula based on the work of the British nineteenth century economist William Stanley Jevons. The ONS announcement can be read online.

The decision follows the conclusion of an independent public statistical consultation held last year by the ONS into the means to correct the increasing disparity between inflation estimates produced by the RPI and the Consumer Price Index (CPI). The disparity has been largely due to what has been called the formula effect since while the CPI makes extensive use of the Jevons method to average price changes the RPI uses the Carli and Dutot methods method. The ONS has decided to keep the existing RPI to maintain continuity for existing users and so for the present the £362 billion index-linked gilt edged securities market will remain indexed to the RPI. There had been accusations that a change in formula, which would reduce RPI estimates down closer to those of the CPI, providing a substantial saving to the cash-strapped British government, was politically motivated. The decision to produce a new index, the RPIJ, instead of changing the formula for the RPI looks suspiciously like a failure of political will.

A seemingly innocuous decision by a statistical agency to reconsider the method of calculation of an index of consumer price inflation is developing into a political minefield with accusations of government manipulation and pressure.  This is happening not in Argentina, where it is widely accepted that the Government’s official inflation measure vastly underestimates rises in the cost-of-living, but in the United Kingdom.  At a public meeting held in London on October 26, 2012 attended by the author, accusations of facilitating a politically motivated agenda were levelled against the Office of National Statistics (ONS).

The controversial meeting resulted from an independent public statistical consultation launched on September 18, 2012 by the ONS into the methodology used to calculate the Retail Price Index (RPI). The RPI was once the principal means of calculating consumer price inflation and the cost of living until superseded by the Consumer Price Index (CPI) in 2003. [1]  The two indices have continued to coexist and although a number of user groups have switched from the RPI to the CPI since the government changed its inflation targeting regime to the new inflation measure, others have stayed with the RPI. For example, despite the move to use the CPI instead of the RPI as an inflation target, the UK government confirmed that index-linked gilts, public sector pensions and benefits would remain indexed to the RPI.  The latter two along with...

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