personal finance

Students and rail users 'penalised by flawed inflation measure'


Students and rail passengers have been unfairly penalised by the government using a “flawed” measure of inflation that needs to be urgently fixed, according to a highly critical report from peers.

Ministers have been able to use a tactic of “inflation shopping” to select the retail prices index measure of inflation when it stands to benefit the exchequer, and the typically lower consumer prices index to keep a lid on outgoings, the House of Lords economic affairs committee said.

The peers said the government was doing this despite knowing there was an error in the calculation of RPI, which typically made the measure of inflation about 0.5% to 0.8% higher than CPI.

Changes in 2010 to the way in which clothing prices were collected to formulate RPI caused the problem and meant the statistic was “flawed”, the report said.

The committee warned the UK Statistics Authority, responsible for overseeing economic figures, was at risk of breaching its statutory duties and the Whitehall agency’s refusal to fix the problem was “untenable”. While urging RPI to be fixed, it said the government should only use CPI until the error was removed.

The government is gradually moving away from using RPI to CPI, with further plans to use another measurement of inflation known as CPIH, which also includes housing costs as well as the usual price changes measured by CPI.

“Winners and losers” have however been created by the use of RPI instead of CPI in the meantime, according to the committee’s report. Investors in RPI-linked government bonds have been receiving about £1bn more in interest payments each year, even though others have lost out.

Research from the House of Commons library suggested students were saddled with up to an additional £16,000 of debt as a consequence. Average rail fares rose 3.1% at the start of the year, above the rate of increase in average pay packets.

Michael Forsyth, the chairman of the committee, said: “When the government gives money to people it is generally opting to adjust payments for inflation using the consumer prices index. But when it takes money from people, it is generally opting to use the retail prices index, which has been around 1% higher than CPI in recent years. This simply is not fair.”

A spokesperson for the Office for National Statistics, which publishes inflation data on a monthly basis, said: “We agree the RPI has significant shortcomings. We will therefore continue to work closely with our counterparts in government and at the Bank of England and respond to the committee.”

A Treasury spokesperson also said RPI was flawed and added it was moving away from using it.

“Given the extensive use of RPI across the public and private sectors, further moves away from the measure are complex and potentially costly. As set out at budget, the government’s objective is that CPIH will become its headline measure over time and that it will reduce the use of RPI when and where practicable,” the spokesperson said.



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