Report on future of UK measures of inflation recommends end to RPI, but "slow process" of change continues, says expert

Paul Johnson of the Institute of Fiscal Studies (IFS) also said that there was a "strong case" for the Office of National Statistics (ONS) to replace the Consumer Price Index (CPI) as its main measure of inflation with a version that also reflects owner-occupiers' housing costs, called CPIH. He said that the UK suffered from an "unhelpful proliferation" of measures of inflation, some of which contained "basic statistical flaws".

The UKSA said that it would consider Johnson's recommendations in detail before issuing a public consultation in the summer. Although the recommendations are not binding, RPI was dropped as a 'national statistic' by the UKSA in 2013 and was replaced by CPI for the purposes of public sector pensions and state benefits in 2010. However, many private sector defined benefit (DB) pension schemes and commercial leases still rely on RPI-linked increases, and it is still used in annual regulated rail fair increases and a significant percentage of government bonds.

Pensions expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, said that, whatever the outcome of the consultation, any phasing out of RPI would continue to be a "slow process".

"In early 2013, the ONS decided not to update the methodology behind RPI - which everyone agrees is outdated - and instead decided to keep producing it on the current basis but to downgrade it from its status as a national statistic," he said. "It did so in response to vociferous protests that any changes to RPI would cut across previously-struck bargains, such as gilts or some private sector pension scheme increase rules."

"So far as the government is concerned, these recommendations are potentially very good news. The report directly recommends that taxes should not be linked to RPI, potentially leading to a very large increase in tax take. In an election that looks likely to have a central strand revolving around how best to approach reducing the deficit, this is potentially a very large rabbit to pull out of a hat. For employers who are stuck with DB pension schemes with RPI-linked benefits, the news is less good: unless RPI is scrapped completely, many of these employers may find themselves stuck with this costly link for some time to come," he said.

The ONS currently publishes four measures of inflation: CPI, CPIH, RPI and RPIJ. The formula for calculating CPI considers the spending behaviour of people who might switch to cheaper alternatives as prices increase including pensioners, foreign visitors to the UK and students in halls of residence; while RPI excludes the top 4% of households by income and low-income households, such as those of pensioners or people on state benefits.

CPI does not include changes to the cost of housing, such as the value of mortgage interest payments, house depreciation and council tax. The ONS began publishing CPIH, which is based on the CPI but takes these costs into account, in March 2013, but it is not currently designated as an official statistic. Johnson has recommended scrapping RPIJ, an amended measure of the RPI introduced at the same time, in its entirety.

According to Johnson, use of the RPI to index government bonds costs the UK taxpayer around £2 billion annually due to the historical difference between the rate and the CPI. The latest official statistics showed that CPI fell from 1.3% in October 2014 to 1% in November, while RPI fell from 2.3% to 2% over the same period. However, Johnson acknowledged the fact that some of the bonds currently based on RPI would not mature until 2068.

"There's currently no indication that RPI be scrapped: the report simply recommends that tax, benefit and regulatory regimes stop using it," said property law expert Tim Dale of Pinsent Masons. "However, it's no great leap of faith from it ceasing to be used for national purposes to it ceasing to be published. If it were scrapped, that may have an adverse impact on property values where the occupational lease is geared to RPI."

"Many leases are future-proofed – to take account of RPI ceasing to exist – but the nearest inflationary measure to substitute for RPI may well produce a lower figure and so reduce the potential for rent increases. That will hit property values. Landlords putting in place leases linked to RPI now ought to consider if there might be another inflationary measure which could be substituted; for example, CPI plus 0.75%," he said.

Johnson also recommended that the UKSA and ONS publish significantly more information about the effects on different groups of households of changes to prices and costs. Research carried out for the purposes of the report showed that households had experienced considerably different rates of inflation over the past decade due to changes in spending patterns depending on their relative wealth, he said. The report also recommended changes to the methodology and data used to compile pricing statistics.