Today has seen a shocking decision on the Retail Prices Index or RPI

This morning the Chancellor of the Exchequer has announced his plans for the Retail Price Index or RPI. This is an issue close to my heart and something I have put a lot of time and effort into since its future became the subject of doubt in 2012. The moment we were told on Monday that today was the day I feared the worst along the lines of the saying “a good day to bury bad news”. With the Chancellor’s Budget Statement and the ongoing debate in Parliament over Brexit today has proven to be a day that the UK deep state thinks it can get away with something it has been angling for since 2012.

In essence HM Treasury has wanted to scrap the RPI because it is expensive in terms of the interest paid on UK index linked Gilts and for various pensions. Of course those making such decisions often benefit from RPI linked pensions it is for others and particularly younger readers that they want it to go. The last 7 years have seen various methodological efforts mostly around the formula effect but they have found themselves up against opponents like me and their cases have foundered and sunk.

Housing Costs

This is another area where up until today the HM Treasury effort had mimicked the Titanic. If we go back to 2002/03 the UK introduced a main measure of inflation that excluded owner occupied housing costs called CPI. Why? Well in a familiar theme it is cheaper for the Treasury as it gives a lower reading than the RPI, and more subtly when it is put in the GDP numbers it gives a higher reading ( averaging about 0,23%).

Next they though they could do better and find a way of measuring housing costs and further reduce the inflation number. That hit the barrier that house prices are soaring so instead of real numbers they decided to make some up. This is the Rental Equivalence system where they assume home owners pay rent to themselves when they do not. Rental Equivalence is the inflation version of Imputed Rents. In the UK the measure based on this is called CPIH and partly due to my efforts has been widely ignored.

House of Lords

The Economic Affairs Committee published a report in January after taking evidence from various sources including me and here is an example.

The Deputy National Statistician, Jonathan Athow, said that the lack of a measure of owner-occupier housing costs in CPI was its “major weakness”. Shaun Richards, an independent adviser to pension and investment funds, said that “if there is something untenable in my opinion it is a measure of inflation which completely ignores a very important sector which is owner-occupied housing.

In their report they then went on to reject the Rental Equivalence methodology of CPIH.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs. The UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on the best method for capturing owner-occupier housing costs in a consumer price index.

Over to the UK Statistics Authority

Here is their response to this.

In light of the 10 years of development and consultation, ONS are not minded to undertake any further engagement with users and experts specifically on rental equivalence and owner-occupier housing costs. There is never likely to be agreement on a single approach.

As no doubt many of you have spotted that is shifting the goalposts as the EAC from the House of Lords had rejected an approach. Why are they shifting the goalposts? Well they are back with the rejected approach.

ONS views rental equivalence as the correct approach conceptually for an economic measure of inflation, and one where sufficient data is available to make it practical. Of
course, they remain committed to ongoing monitoring and development of the CPIH and the Household Cost Indices.

Here is the crux of the matter. They have made a decision and regardless of the objections and argument they keep making the same decision. They lose the debate but come back again.Over time I have rallied support at the Royal Statistical Society ( which in another “accident” of timing is in a conference this morning and cannot reply) and as you can see above the House of Lords. So it leaves me mulling this from Hotel California.

And in the master’s chambers,
They gathered for the feast
They stab it with their steely knives,
But they just can’t kill the beast

Another problem with Rental Equivalence

Tucked away in the House of Lords report was something of a bombshell.

 We note that the private rental market is subject to its own distortions and may not provide a good proxy for owner-occupier housing costs.

The fantasy structure of Rental Equivalence relies on good data from ordinary rents. Just for clarity I have no problem at all with the concept of using rents for those who do. But there are two catches. They are hinted at in the quote above and let me specify them. There are doubts that the properties which are let are that similar to those which are owned. But more fundamentally I have seen experts post concerns that due to the mixture of new and old rents being incorrect in the survey used the number is up to 1% too low. Since it claims currently rental inflation is of the order of 1% that is quite an issue!


This is something we are regularly denied as for example work was done around 2012 around the Formula Effect but has never been published. I and others are of the opinion that fashion clothing and more recently computer game pricing are factors here. Today is not for the detail but I wrote to both the EAC and the Treasury Select Committee on this subject on February 26th as follows.

My understanding of this which I have checked with others is that the exact impact of the change is unknown because the Office for National Statistics suspended its investigation into this back in 2012. Perhaps one day it will properly explain why it did this but for now the main issue is that we do not know the precise impact until the proper research is completed and peer reviewed. I am sorry to have to point out that your letter is therefore potentially materially misleading and has already had a market impact on the price of index-linked Gilts.

This is a familiar theme where there are claims of research but when you ask for it then it does not appear. If I ever get a reply to that letter I will let you know.

I had other concerns but I am here just establishing a principle.


There are various conceptual issues here of which the simplest is that over the past 7 years the UK statistical authorities have pursued a campaign which has been one of propaganda rather than argument. We have done much better here as those of you who have followed the replies of Andrew Baldwin will know. He has made the case for the RPIJ measure which revealingly was first promoted but then abandoned by the UK statistical establishment when it did not give them what they wanted. Their behaviour was similar to a spoilt child taking their football home with them.

On a conceptual level the statistician Simon Briscoe has covered it well I think.

The details of the opportunities missed are in the table below but with ONS producing sub-standard documents like the infamous “shortcomings” paper, OSR failing (I think ever) to criticise anything that ONS has done on RPI, and the UKSA board not even trying to sort anything out (and being subservient to the Treasury), there is little hope.

The OSR is the Office for Statistics Regulation to which I gave evidence and I would say they ignored it but for the fact I believe it went straight over their heads.

Let me also address why the Bank of England supports this. Their main game is to inflate house prices. So if you keep house prices out of the inflation measure it is all growth or from their perspective jam today. First-time buyers or those trading up face inflation and face in many cases unaffordable properties yet according to the inflation numbers they are better off!

But there is a glimmer of good news. I suspect that the Chancellor Sajid Javid thought he would kick this particular can onto somebody else’s watch.

Today the Chancellor has announced his intention to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

I intend to continue to fight on as the establishment view has crumbled so many times before. There is hope around the Household Cost Indices mentioned above although they are a good idea which the establishment are trying to neuter ( You will not be surprised that it is in the areas of housing costs and student loans). So let me leave you with the Fab Four.

The long and winding road
That leads to your door
Will never disappear
I’ve seen that road before
It always leads me here
Lead me to you door


Victory on the Retail Prices Index! And it feels good!

This morning I have some good news to report which is the result of the around 7 year campaign I have conducted in support of the Retail Price Index or RPI. I have given regular readers a sense of deja vu with the headline and let me add to that with something I wrote for Mindful Money back on the 10th of January 2013.

I am pleased to report that today’s update will be very upbeat and will contain sections which I hoped to be able to write but felt were certainly far from favourite to take place. Regular readers will be aware that the subject of inflation is a specialist subject for me and a sub-section is the official attempts to “improve” ( in my financial lexicon such an “improvement” equals a lower number). Accordingly when the National Statistician decided to have a consultation to “improve” the UK Retail Price Index I feared the worst. However I hoped and worked for the best as I not only attended the public meeting and explained my view but responded to the consultation both in my own name and as part of the RPI CPI User Group at the Royal Statistical Society.

Those who have followed the saga will recall that last summer I noted a new review of the Retail Prices Index this time by the House of Lords Economic Affairs Committee ( EAC). I feared another establishment stitch-up so I invited the EAC to a meeting on the subject at the Royal Statistical Society to expose them to other points of view, including mine as I was one of the speakers.

In case you are wondering what this is about I will go through the technical points below but it can be summarised in the theme that the establishment invariably finds reasons to object to inflation measures which give higher numbers and favour ones with lower numbers. In terms of UK inflation that means attacking the RPI (2.7%) and proposing the measure called CPIH (2%). From the point of view of HM Treasury such a gap if compounded over time on matters such as pensions and benefits saves it a lot of money, and the gap has usually been larger than that recently. Thus whilst I have battled the Office for National Statistics, the Office for Statistics Regulation and for long periods the economic editor of the Financial Times Chris Giles the main opponent in my opinion has been HM Treasury.

What has happened here?

The official campaign was publicly pushed as being due to what has been called the “Formula Effect” which is much of the gap between RPI and the various CPI variants. I have long thought that much of the force behind the argument came from the fact that the RPI has house prices in it as well, leading to usually higher readings. But there was a way of investigating and then (hopefully) fixing this Formula Effect.

We heard evidence that the Carli formula, as used in the RPI, produces an upward bias. But expert opinion on the shortcomings of the RPI differs……. There is however broad agreement that the widening of the range of clothing for which prices were collected has produced price data which, when combined with the Carli formula, have led to a substantial increase in the annual rate of growth of RPI.

The Formula Effect has been driven by a problem in the clothing sector and particularly fashion clothing triggered by a change made in 2010. My argument all along has been let’s fix that as the Formula Effect would then be much smaller. The estimates are that the Formula Effect would be halved and maybe a bit more. We do not of course absolutely know this although there was some official research ( which was rather suspiciously abandoned) back in 2012 which gives some clues. If we get the Formula Effect more than halved then this can return to one for statistical purists rather than being at the forefront of the UK inflation debate.

given the properties of the Carli formula that may lead to upward bias have long been evident, yet expert opinion still differs, it may be a perpetual debate.

Putting it another way a major influence in this has been price collection on women’s strappy tops. The statistician Simon Briscoe was very powerful on this point.

We have to bear in mind that strappy tops are one-thirtieth of one per cent of the RPI. I can think of no other area of life or public policy where if one three-thousandth of something was wrong, we would discard the whole lot. We would simply mend it.

Housing Costs

Those who have followed my work on this subject will know that I can only type, yes yes yes! To this next bit.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

This has been a long battle against the UK establishment and for most of this period against the Financial Times as well. For example the Paul Johnson Inflation Review of 2015 supported the use of the inflation measure CPIH which uses rental equivalence or imputed rents. These do not exist in real life and are an entirely fictional concept as opposed to the house prices ( via a depreciation component) and mortgage interest-rates which not only exist but are widely understood that the RPI uses.

If it was left to me I would improve the RPI by having an explicit house price component rather than the implicit depreciation one. Maybe the EAC will get around to that.


There is much to welcome here from the EAC as if its recommendations are implemented two major problems with UK inflation measurement will be improved at worst and fixed at best.However the statistics establishment comprising the Office for National Statistics and the Office for Statistics Regulation have seen their reputation badly damaged by the frankly spiteful decision to do this and then for the latter to rubber stamp it.

given its widespread use, it is surprising that the UK Statistics Authority is treating RPI as a ‘legacy measure’. The programme of periodic methodological improvements should be resumed.

I gave evidence to the OSR and frankly I was left with the view that it is the equivalent of a chocolate teapot and should be scrapped. Just to be clear the EAC does not go that far.

Also it is welcome that other areas have come round to more like my point of view as I see that the Financial Times and Paul Johnson have been willing to look to correct past mistakes. It is never easy to do that so we should welcome it.

On the downside I see two main problems with the Review.

In future there should be one measure of general inflation that is used by the government for all purposes. This would be simpler and easier for the public to understand.

I see the point of trying to stop the government from “inflation shopping” but the truth is that we need different measures for different purposes. For example a cost of living index for wage negotiations is not the same as one for the national accounts.

The idea that we should use CPI for now and then later use a new number that includes owner occupied housing later has various problems.

The government should begin to issue CPI-linked gilts and stop issuing RPI-linked gilts. We heard evidence to suggest there was sufficient demand to make a viable market

That seems silly as we would end up with 3 types of index-linked Gilts ( RPI, CPI, and the new measure likely to be the improved RPI). Also we were supposed to put owner occupied housing in CPI back in 2003 but somehow it got “forgotten” for over a decade.

So my suggestion is to get on with improving the RPI and give the work a twelve month deadline. Then in a year’s time we could issue index-linked Gilts based on the new measure. We might be able to update some of the existing Gilts on the new basis as well but that is a matter for the Bank of England but some we would not as there were explicit rules in their documentation.

Me on The Investing Channel