RPI and CPIH changes consultation delayed until March
15 January 2020
Chancellor Sajid Javid has confirmed that the launch of a consultation on the Retail Price Index (RPI) will be pushed back until the March Budget.
In a letter to the House of Lords’ Chairman of the Economic Affairs Committee, the Chancellor said that while the launch date had originally been planned for this month, it has been agreed with the UK Statistics Authority (UKSA) that it will now launch on 11 March.
The consultation will address the shortcomings of RPI and whether the UKSA’s proposal to align the methodology with the Consumer Prices Index including occupiers’ housing costs (CPIH) should be introduced earlier than the suggested 2030, and if so, when between 2025 and 2030.
Following launch, the consultation will be open for responses for a period of six weeks until 22 April. The government and UKSA will respond to the findings before the Parliamentary summer recess, the Chancellor said.
The consultation follows a report by the Economic Affairs Committee, which criticised the government for failing to correct an error within the RPI which caused it to rise above the Consumer Prices Index. At the time, Lord Forsyth of Drumlean, chairman of the Economic Affairs Committee, said that by continuing to publish a flawed index, the UKSA was “in breach of its statutory duty to promote and safeguard official statistics.”
Tom Selby, senior analyst, AJ Bell, said: “RPI has been widely lamented as an inflation measure by statisticians and politicians alike, so it is no surprise the government has faced calls to jettison it in favour of a more accurate measure – most likely CPIH – at the earliest possible opportunity.
“However, such a move could have far-reaching implications for savers, investors and consumers.”
Those with defined benefit schemes where rules stipulate that members’ retirement income rise in line with RPI, could see cuts to their pensions if contracts with RPI were replaced with CPIH.
Anyone invested in index-linked gilts – individuals and pension funds alike – would also see the value of their funds fall if the government applied a blanket overnight switch from RPI to CPIH.
Conversely, companies sponsoring DB schemes with RPI-linked increases would likely be able to downgrade their pension liabilities, effectively shaving off billions from aggregate pension deficits.
According to Selby: “The big question the government needs to answer is the extent to which it will mitigate any negative impact on people with pensions and investments explicitly linked to RPI. One option in this regard would be to maintain a notional RPI which these contracts could then adopt, although this might mean RPI remains part of the system for decades.”
However, scraping RPI could spell good news for younger generations and commuters, with the government continuing to link things such as rail fare increases and student loan repayments to RPI.
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