UK to continue to use existing Retail Prices Index to measure inflation

Food Retail

The UK’s statistics agency has decided to keep the existing Retail Prices Index (RPI) measure of inflation even though it is not in line with international standards, it was announced today.

Instead of making changes to the way the RPI is calculated, an additional RPI-based index known as RPIJ will be published from March 2013.

The decision follows a three-month period of consultation by the Office for National Statistics (ONS) and means that the RPI will continue to be used for calculating the return on private sector pensions and index-linked gilts and bonds.

Any change to the RPI index would have reduced future pension increases and cut the income of investors in index-linked government bonds. It would also have saved the Treasury billions of pounds a year in interest payments.

The consultation by the ONS considered various options for improving the RPI in an effort to address the gap between the two measures of inflation, which is caused by statistical effects, and align the RPI more closely to the slower rising Consumer Prices Index (CPI).

However, Jil Matheson, the National Statistician, concluded that that there is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change.

Or, to put it another way, the ONS has decided that, when it comes to inflation, it’s better to be consistent than to be right, the BBC’s economics editor Stephanie Flanders said.

RPIJ will differ from the RPI measure in that it will use an alternative arithmetical formula for calculating average prices. It will be published each month alongside the existing RPI and CPI measures.

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