The Edge

Richard Northedge takes on corporate finance

ONS right not to fiddle with the figures

When statistics are rebased they risk being debased. The Office of National Statistics is thus correct in retaining the Retail Prices Index, however flawed a measure of inflation it is.

If the RPI had been brought into line with the Consumer Price Index the government’s statistical body would have damaged its own credibility as well as the credibility of all data. It would have looked like numeric manipulation for political objectives and called into question the independence of the ONS and cast doubt on all figures from employment totals to the balance of payments.

The RPI is used to increase many private-sector pensions and is the base for indexing government bonds. Moving to the Consumer Price Index, which tends to be lower, would mean lower pensions and poorer returns for investors.

In practice, while pensioners might have to suffer from the change, investors would resort to the law courts to enforce their contracts so a new index could be applied only to new bonds. The RPI would have to continue being calculated, even if only for a shrinking group of investors.

The main difference between the two indexes is the treatment of housing costs. The CPI tends to be about 1 per cent below the RPI but the two happen to be fairly close at present. In 2009, however, the RPI was showing prices falling at more than 1 per cent year-on-year when the CPI was still positive.

That’s an anomaly, but the ONS has rightly decided that continuity is more important than such oddities. Retaining RPI gives a time series than extends back to 1947. People are more likely to trust data that has been consistently produced over such a period than some new index produced to suit the moment.

A new index will be introduced by the ONS, but the old RPI will be retained. Statistics come in and out of fashion. Remember Nigel Lawson’s TPI - the Tax & Prices Index? Or look how Money Supply definitions have changed from M0 to M3. RPI may go out of favour but it is important it is still produced.

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