Inflation

Lord Lea of Crondall Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Lea of Crondall (Lab)]

My Lords, I begin by referring to a remark made by the noble Lord, Lord Macpherson, about the confidence that people must have in statistics. I was on the Retail Prices Index Advisory Committee for many years when I was at the TUC. I draw attention to the fact that a very strange omission in the report, which the noble Lord, Lord Forsyth, did not mention, is that what most people associate with the RPI is not gilts or housing costs but wage negotiations. The bedrock of all wage negotiations is the RPI. No one anywhere would think that the yardstick in wage negotiations could ignore the RPI.

Before we scrap the RPI—some people want to do that, so let us make no bones about it—we have to relate that to the dictum about confidence. If anybody in this country ever starts to think that somebody has a vested interest in tinkering around with the RPI, that will be a very bad day indeed. For that reason and others, I am glad that the committee has come down on the side of reforming the RPI but not abandoning it.

That being the case, I would like to put a question to the Minister. Is he aware that, in recent months, there has been a concerted campaign from somewhere in the newspapers, where any reference by economic correspondents to the RPI is preceded by the adjective “discredited”? If you pick up any dozen references in the last six months to the RPI or any consideration of it in the newspapers, you will find the word “discredited”. Where is this adjective coming from? It must be coming, I suspect, from the Treasury or the Bank of England. I would like to hear any other suggestions about where it is coming from, but these organisations have regular confidential conversations with economic correspondents —I do not think that the ONS does in quite the same way.

For the first time, we are in danger of making this issue into a bit of a political football. It has never been a political football, and I hope that it never will be. I do not even think that Boris Johnson would have it in mind to remove Brussels sprouts from the index. There has never been any political interference with it. The advisory committee has always tried to reach an agreed conclusion, although I think that some years ago there was a vote about something to do with housing costs.

That leads to my second point, which is that there is no perfect solution. I thought that the noble Lord, Lord Darling, let his rhetoric run away with him in implying that somehow a clear overall message was coming out of this and that something ought to be done about it. It is a very delicate balance indeed.

On housing costs, I think that the report says almost in these terms, “Well, we don’t much like housing costs being in the index, but on balance we can’t have an index without them in it”. If that was not in this committee’s report, it was in that of another weighty committee not so long ago. Housing costs are inherently very difficult because, unlike Brussels sprouts, they are ultimately a question of the valuation of land. We all know that economics textbooks refer to the factors of production being land, labour and capital, but in practice, of course, land is not a factor of production—as somebody once quipped, “They don’t make much of that any more”. The house price question has been a main driver of the change in economic activity in many parts of the country—exacerbated, I would say, by the component of RPI that we cannot take away—and there is obviously a difference between the received estate agent index affecting London and that affecting Aberdeen or Aberystwyth. So there are a number of delicate dilemmas.

I recognise that the committee does not conclude with a broad rhetorical flourish; it concludes with some careful recommendations—not throwing javelins at random in the direction of somebody at fault who has not been paying attention. That is why Mr Boris Johnson’s namesake himself adjusted his position to look at this thing in the round. Broadly speaking, I think that this is a good report, but there are arguments on both sides of many of the questions under scrutiny.

Yes, it is true that the RPI is generally a bit above the CPI, but that is factored into much of industrial life. Saying that there should be just one index is a dangerous road to go down when all the academic literature at least pays lip service to the notion that, if you are looking at macro policy or international monetary policy, you probably need something constructed along the lines of the CPI. But given that historically, ever since the Ernest Bevin era when it was created as a cost of living index, the retail prices index has had confidence, we should stay with it. On getting a solution to the clothing dilemma, I do not totally understand it, but clearly it is correct to have that recommendation.

The people at the receiving end of statistics such as the RPI might expect the House of Lords’ Economic Affairs Committee to include some people who have been a bit more involved in wage negotiation; there are no such people in sight on the committee and this is relevant to the point we were debating half an hour ago. This is a matter for the man and woman on the street; it has become a bit of a debate between the economic academics, the Treasury and the Bank of England.

I finish with the theme on which I began, which is that it is a pity that there should be this relentless and democratically not very sensible campaign on the part of certain bodies—I suspect that it can only be the Treasury and the Bank of England—who keep putting the word “discredited” before “RPI”. Given the state of Britain now, that is not a very sensible thing to do. Although the RPI is not perfect—and no index is—many of the criticisms made of it reflect a misunderstanding of its purpose and are implicitly based on the erroneous assumption that it should follow in full the economic principles suitable for indices such as the CPI and CPIH.

I am sorry for making a rather long statement, but one cannot say that people should accept in their wage packets a difference of minus £350 a year by shifting from the RPI to the CPI. That is a street level understanding of the question, not a highly academic one.

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[Lord Turnbull (CB)]

My Lords, earlier today, the House confirmed my P45 from membership of the Economic Affairs Committee. I greatly enjoyed working under the chairmanship first of the noble Lord, Lord Hollick, and latterly that of the noble Lord, Lord Forsyth. It was also an exquisite pleasure to note the conversion of the noble Lord, Lord Forsyth, to the cause of social housing and—as we will hear—ultimately to more generosity in the provision of long-term care.

I want to take this opportunity to pay tribute to the work of the late Lord Jenkin of Roding, who had an enduring interest in the quality and integrity of national statistics. He was instrumental in passing the Statistics and Registration Service Act 2007, which brought about important changes to the governance framework. We have already seen some important interventions from the statistics authority where it has identified abuses or distortions; for example, the notorious £350 million claim in the Brexit campaign and its decision to alter the presentation of student loans in the national accounts to give a more accurate picture of the incidence over time of write-offs of debt.

Nevertheless, some significant controversies remain unresolved, some of which, as the House has heard, are of the statistics authority’s own making. Three steps brought them to a head. First, the then Government decided to specify the MPC’s inflation target using the CPI to bring us into line with the rest of Europe. They also explained that the CPI was running about 0.5% a year slower than the RPI. The switch allowed the Chancellor of the Exchequer to claim that he was targeting lower inflation without the Bank having to do much tightening. It also allowed him to tell Tony Blair, who was like the impatient boy in the back of the car and was disappointed that the five tests did not support entry into the euro, that we were getting nearer.

At that stage, the change was confined to the realm of monetary policy. The next event was around 2010, when the ONS made the now notorious change to the way in which clothing prices were collected, which had the immediate impact of widening the gap by another 0.3%. The ONS reviewed that outcome but surprisingly decided to do nothing about it. However, the statistics authority—I emphasise that it was the statistics authority; the noble Lord, Lord Lea, tried to claim that it was the Treasury or the Bank—then declared that the RPI was a very poor measure of inflation that did not have the potential to be developed into a good one. It would therefore go on publishing the RPI but no longer designate it as a “National Statistic”.

[Lord Lea of Crondall]

My Lords, although I attributed possible motive to the Bank and the Treasury, I said that my main concern was the lack of authority to put this adjective in front of it to say that it was discredited. On what basis can officials brief the press that the RPI is discredited?

[Lord Turnbull]

The basis on which that was done was that the statistics authority said it was flawed; that, I thought, was sufficient. Anyway, it said it would go on publishing the RPI and no longer designate it as a “national statistic” but rather, treat it as a legacy measure, with no further work to develop it. The chief statistician said there were many flaws with the RPI. For example, if it is used in the Carli index, which is a very simple test, if something goes up by 25% and then down by 25%, it does not end up where it started—the so-called time reversibility test. It said that it was not worth changing the treatment of clothing if it was not going to look at all the other issues.

This policy of spartan neglect proved controversial, provoking the inquiry by the EAC. Our conclusion was that RPI was deeply embedded in many aspects of economic life—on this we agreed with the noble Lord, Lord Lea—and it was wrong of the statistics authority and the ONS to just walk away from it. Indeed, it was argued that the statistics authority had a statutory duty—

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[Lord Young of Cookham (Con)]

My Lords, I thank my noble friend Lord Forsyth for introducing this and all noble Lords who have taken part in an exceptionally well-informed debate on a rather specialised, but none the less important, topic which impacts directly on all of us—as the noble Lord, Lord Darling, and my noble friends Lord Tugendhat and Lady Browning, explained. I also thank noble Lords for their detailed report, for which the Government are grateful; I thank, too, the departing members of the committee for their work.

Normally, I look forward to debates on my noble friend’s reports, but on this occasion it cast a small cloud over my weekend, as I realised that what I have to say may leave my noble friend and his committee less than satisfied. However, I hope to persuade him that there are good reasons for that. In fact, much of the debate focused not exclusively on the Government but on the role of the UKSA—particularly the speeches from the noble Lords, Lord Burns and Lord Turnbull. I am sure that they will read with interest what we have said today.

As a former Treasury Minister, albeit some 25 years ago, I took a deep personal interest in the Government’s response, possibly straying from my advertised role as a spokesman for the Treasury. I have read the report, which raises a number of complex and wide-ranging issues on the RPI, the Government’s use of inflation statistics, and the future of measuring inflation.

Before I continue, may I first pay tribute to John Pullinger, who recently retired as National Statistician? He had a distinguished term in that post. To mention but a few of his achievements in the role, he led the ONS strategy entitled Better Statistics, Better Decisions, headed the newly created analysis function, and worked alongside the UKSA to, in his own words, make it,

“unacceptable for people to either not use evidence, or to misuse it”,

a sentiment with which I am sure this House concurs—and relevant in view of the exchange earlier today in the Oral Question from the noble Lord, Lord Foulkes.

I should like to address the concerns of my noble friend Lord Forsyth, and the other noble Lords who sit on the Economic Affairs Committee, on the lack of a government response to their report, which was published in January—an issue raised by many noble Lords, including the noble Lord, Lord Sharkey.

The Government appreciate the amount of work and the level of scrutiny that go into all the committee’s inquiries; we understand its frustration. I regret that there is yet to be a government response and understand the difficulties in debating a Select Committee report without one being available. This delay is not driven by inaction. The issues that the report raises are complex and wide-ranging. Measures of inflation are embedded across the economy and affect the lives of almost everyone in the country. They include rental agreements, mobile phone contracts, financial instruments, government debt, pensions and rail fares, to name but a few.

[Lord Lea of Crondall]

Will the Minister take this opportunity to include wage and salary increases in that list? It seems quite extraordinary that the main quantitative use of the RPI does not get a mention, even now.

[Lord Young of Cookham]

I said, “to name but a few”, but I will gladly add the issue raised by the noble Lord to the list. Some, but not all, wage increases are linked to RPI.

Some uses of the measures are interlinked; for example, for pension schemes whose members, many of whom are in private sector defined benefit schemes, have pension payments that increase by RPI. This means that, in turn, those schemes seek RPI-linked assets to hedge those liabilities. As a result, a large share of the Government’s outstanding RPI-linked debt is held by those pension schemes. The Pension Protection Fund estimates that almost 90% of outstanding index-linked gilts are held by UK defined benefit pension schemes and UK insurance companies.

The breadth, complexity, and importance of these issues mean that the committee’s report requires further careful consideration. Given the complexities of the issue, it is sensible that the Government and the UKSA produce a well-considered response—while respecting the UKSA’s independence, of course.