CPI ‘is costing Britain billions’

Britain’s government should stop using a discredited measure of inflation for selling index-linked bonds which is costing taxpayers billions a year, an official review said yesterday.

The review, carried out by Paul Johnson, head of the Institute for Fiscal Studies think tank, also urged Britain to replace the Consumer Price Index as its main inflation measure with another index, the CPIH, which includes more housing costs.

Mr Johnson said Britain had an “unhelpful proliferation” of inflation measures. He recommended ending the use of the Retail Price Index as a basis for a range of contracts, including inflation-linked government bonds, which could instead be pegged to the CPI or CPIH.

The RPI lost its designation as a national statistic in 2013. It was developed in the middle of the last century and uses averaging techniques which can lead to the index rising even when underlying prices stay the same. But the British government still uses it for inflation-linked bonds.

Even pegging such linkers to a different form of the same index, the RPIJ, which solves the averaging problem and is usually lower, would save the taxpayer about £2bn (€2.56bn) a year, Mr Johnson said.

“The government has continued to issue (bonds) based on the RPI at a time when they have known there are problems, or should have know there are problems with that.”

The UK Debt Management Office, which rejected switching to CPI-linked bonds in 2011, said yesterday it would keep selling RPI-linked bonds while that remained what investors wanted.

“The nature of investor demand for RPI inflation protection, especially from a major part of the pension fund industry ... results in cost-effective issuance for the taxpayer,” it said.

Mr Johnson said it would be legally difficult to change the contracts of the £470bn of index-linked bonds which have already been sold, some which do not mature until 2068.

The review, carried out for the UK Statistics Authority, also recommended the statistics office “should move towards making CPIH its main measure of inflation”.

The CPIH incorporates owner occupiers’ housing costs based on equivalent rental values. It has tended to be slightly lower than the CPI, though the two have been at the same rate since August.