Azernews.Az

By Bloomberg

The British government should end the use of the Retail Price Index measure of inflation for adjusting taxes, social benefits and bonds as it’s flawed, according to a review commissioned by the U.K. Statistics Authority.

Officials should work toward ending use of RPI “as soon as practicable,” Paul Johnson, director of the Institute for Fiscal Studies and the review’s author, said in today’s report. The study favors the use of CPIH, a consumer-price index that includes housing costs, as the main inflation measure.

The report was commissioned in response to long-running concerns about the U.K.’s inflation data and the proliferation of measures of price growth. The U.K. Debt Management Office said in response to the review that future cash flows on existing index-linked gilts will continue to be tied to RPI.

Johnson said the Statistics Authority and the Office for National Statistics “should make it clear to users that the RPI is not a credible measure.” The government “should move away from selling gilts linked to the RPI,” he said.

The government has previously consulted on the possibility of selling debt linked to consumer prices in 2011 and judged it would not be cost efficient in the near term, the DMO said. It will keep the matter under review. Johnson said the choice of index is a “policy decision for government” and any change should be subject to public consultation.

Flawed Inflation

The flaws in RPI are well understood and “many market participants remain comfortable with its ongoing usage,” Henry Skeoch, a strategist at Barclays Plc in London, wrote in an e- mailed note. “There is clear potential demand from the pensions community for CPI/CPIH-linked gilt issuance, but it would be impractical and in our view unfeasible to simply cease RPI- linked issuance.”

U.K. index-linked bonds surged after Britain’s National Statistician Jil Matheson said in January 2013 that the U.K. would maintain its formula for calculating the the index, easing investor concern about changes to the measure that may have impaired payments. The yield on 10-year inflation-linked gilts was little changed today at minus 0.931 percent.

“The Johnson Review may, at the margin, raise the likelihood that the DMO start issuing CPIH-linked bonds at some point,” Michael Saunders, an economist at Citigroup Inc. in London, wrote in a note. “Any such change probably would, at least, wait for the resolution of the CPIH measurement issues and a shift to using CPIH as the inflation target measure.”

Today’s report called for the ONS to expand the way it collects prices to include website scraping. The current method, which involves agents visiting shops and recording prices, haven’t really changed since the 1940s, Johnson said.