Banks and finance
Mark Carney calls for 'meritless' RPI measure to be axed
By Tim Wallace 30 January 2018 • 9:36pm
Mark Carney said it 'would be helpful to have just one public-facing measure of cost of living for consumers' Credit: PA
The Governor of the Bank of England has urged the Government to abandon the use of the retail prices index (RPI) as a measure of inflation, especially in the issuance of government bonds.
The intervention by Mark Carney could have profound implications for both savers and borrowers because RPI tends to run at 0.7 percentage points higher than the consumer prices index (CPI), which is increasingly considered to be a more reliable measure of inflation. Nevertheless, RPI is still widely used in government contracts.
"It would be helpful to have just one public-facing measure of cost of living for consumers," Mr Carney told the House of Lords' economic affairs committee. "At the moment we have the RPI, which most people acknowledge is of no merit, and CPI, which virtually everyone recognises and is the target in our remit.
"At some point it would be good to consolidate to focus on one [measure of inflation]".
The change would mean that savers who invest in inflation-linked gilts would likely earn a lower return. With £311bn of such index-linked gilts in ­issuance, a 0.7 percentage point change in interest could save the Government in the region of £2.2bn per year.
However, a more general switch by the Government from RPI to CPI would benefit students with debts and rail passengers. The interest payments on student loans and increases in rail fares are currently based on RPI and would therefore be lower under CPI.
The Office for National Statistics has long known there are flaws in RPI and that it likely overstates the amount that prices are increasing. In 2015, the economist Paul Johnson conducted an independent review of UK consumer price statistics, declaring that RPI was "not fit for purpose".
The ONS favours a third measure of inflation called CPIH, which also includes housing costs – one of the main outgoings for many British families.
"I'd suggest that it is best to move ­towards indexing contracts around a single preferred measure of inflation," said Mr Carney. He added that it would be reasonable for the Government to make a firm decision about whether it preferred to use CPI or CPIH, and then stick with it. He cautioned against a situation where the Government switched to CPI and then made a further switch to CPIH
"Given the monetary stakes in ­adjusting RPI, perhaps [it is best to find] a way to sequence it to make these decisions all at the same time, in a ­responsible, orderly way."
The Governor said that the Government would have to set a date for the switch so that investors had enough time to adjust to the change.
"In the end you have to pick a date – seven, eight or 10 years down the road, at which you will have transitioned off RPI, and then it gets in the market," said Mr Carney. "You have to decide at what point in future it becomes acceptable. We wouldn't want to be in the same position 10 years from now."
The Government has already started to make the switch in some ­areas. In last November's Budget, Chancellor Philip Hammond announced that ­increases in business rates would track CPI rather than RPI, with the switch taking place in April this year – two years earlier than planned. The Chancellor claimed the move will save businesses £2.3bn over the next five years.
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