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No change to inflation measure

January 10th, 2013 Bussines

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There will be no change to the way the retail prices index is calculated, the Office for National Statistics (ONS) has decided.

After a three-month consultation, the ONS has decided not to bring the RPI more into line with the slower rising consumer prices index (CPI).

Instead, a new additional index of inflation will be created.

However, the RPI will continue to be used for the uprating of private sector pensions and index-linked bonds.

The National Statistician, Jil Matheson, said: “There is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds.”

The inherent gap between RPI and CPI, which runs at an average of 1.2 percentage points a year, has become increasingly dominated by the so-called “formula effect” – the result of using different methods for calculating the average price of goods and services in the economy.

Any decision to alter the current RPI index, so that it rose more slowly, would have reduced the future pension increases of millions of private sector pensioners and cut the income of investors in index-linked government bonds and savers with index-linked savings certificates.

Decision welcomed

The ONS decision means that from March 2013, it will publish a new version of the RPI alongside the existing one.

The main difference will be that the new index will use the same formula as the CPI for calculating average prices.

That will mean the new RPI measure will usually rise more slowly than the long established version.

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Ros Altmann, the director general of the financial services company Saga and former government adviser on pensions policy, hailed the ONS decision as “brilliant”.

“Consultation responses overwhelmingly favoured no change so would be hard to ignore,” she tweeted.

“There’s no right or wrong exact measure of inflation, each one has flaws.”

Tom McPhail of Hargreaves Lansdown said: “This will be welcome news for all those dependent on pension benefits, who might otherwise have suffered a drop of between 0.5% to 1% a year in their income in real terms.”

“It will probably come as a disappointment to employers sponsoring final salary schemes.

“A reduction in the rate of RPI would have reduced some pension scheme liabilities; this in turn would have reduced the amount of money which employers have to pump into these schemes to reduce their deficits,” he added.

The Treasury confirmed it would continue using the RPI measure for calculating the return on both old and new index-linked bonds.

“For gilt investors, future cash flows on existing index-linked gilts will continue to be calculated by reference to RPI,” said the Economic Secretary, Sajid Javid.

“The government will continue to issue new index-linked gilts linked to the RPI.”

The ONS has already decided to launch another new measure of inflation in March, to be called CPIH.

This will be a version of the current CPI index, but adjusted to measure changes in the cost of buying and owning a home.

The main CPI measure excludes those costs, something which has long been seen as its major flaw.