Inflation

Lord Tunnicliffe Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I join other noble Lords in congratulating the noble Lord, Lord Forsyth, on securing this debate, on his committee’s report and on his speech, which he delivered in his usual clear and fairly concise manner. I find myself in a state of shock, praising him in such an effusive way. This is not normal, but we do not live in normal times. The two Tory candidates for the role of Prime Minister are in a bidding war to spend public money. They seem keen to overtake the Labour Party on the left. It will all end in tears, and one of the malign manifestations will be—yes—inflation.

The topic of the report is the measurement of inflation, an involved and important topic. It is one that particularly resonates with members of my generation, given the centrality of inflation to political debate and media coverage of the economy during the 1960s and 1970s. We are also, sadly, the generation that tends to have index-linked pensions. I have four, I think, but I have lost track of which is CPI and which is RPI.

The Economic Affairs Committee has done a valuable service in analysing a faulty methodology, concluding that the Office for National Statistics is failing in its statutory duty to provide accurate economic data. The old established measurement, the retail price index, is subject to much criticism in the report. It has, since 2010, showed a wide discrepancy from the consumer price index, with the gap between the two rising from 0.5% to around 0.8%.

This is of the greatest significance in modern times, as the Government have developed a habit of choosing to apply the lower CPI measure when spending money and the higher RPI measure when collecting it. As Martin Lewis, the founder of MoneySavingExpert.com, said:

“Where it costs us more, they use RPI. Where it costs the state, they use CPI. There is no logical justification, it does not make any sense whatsoever. It’s a very simple way of cooking the books”.


The report refers to this practice as inflation-shopping and calls for the use of a single measure of inflation in future.

As I do not want to repeat points made by many other noble Lords, let me briefly cover why that trend is so problematic. Many welfare benefits are subject to the four-year freeze, which we on these Benches continue to find deplorable. For those benefits uprated each year, such as those aimed at disabled people or carers, the increase is capped at the level of CPI. On the other hand, interest on student loans rises by up to RPI plus 3% each year. The House of Commons Library has estimated an additional cost to students of £16,000 over the lifetime of their loan.

Ministers allow regulated rail fares to rise by the rate of RPI each year, although average pay growth has tended to fall below that level in recent years. Meanwhile, the Office of Rail and Road has confirmed that it will transition to CPI for new connection contracts, as with access contracts. This is designed to lower train operators’ costs, but also to cut state subsidy. Alongside this change, the Secretary of State for Transport wrote to rail unions asking them to calculate wage increases by CPI. Despite warm words, there has been no specific pledge that savings will be passed on to commuters.

These examples highlight that an acute aspect of the problem is the Chancellor’s considerable say in the use of different inflation measures. The UK Statistics Authority has admitted that there is a problem with the RPI but has not ordered a correction in the formula because doing so would impact on many UK Government bondholders.

Box 6 of the committee’s report provided a helpful summary of the clearly defined legal duties on the UK Statistics Authority. Section 7 of the Statistics and Registration Service Act 2007 outlines a public interest in the provision of quality official statistics. Section 21 requires the Chancellor to consent to any fundamental change in the inflation index that would be detrimental to gilt investors—something that the UKSI’s chairman did not believe would be forthcoming. However, both the Chief Secretary to the Treasury and the Chancellor said in their evidence that they would be happy to discuss any proposals for change. I put it to Ministers that the general interest in Section 7 should far outweigh the limited interest in Section 21 and that an appropriate response should be to correct the RPI measure incrementally.

The committee was critical of the UK Statistics Authority for its treatment of RPI as a legacy measure, given that it is still widely used, particularly in pay settlements. As the trade unions have outlined, RPI has long existed as the main reference point for pay negotiations. It has been estimated that a general shift to CPI would see the average worker’s salary fall by £350 per year. It would also have a significant impact on pensions.

In March 2018, the Department for Work and Pensions calculated that a switch to CPI on defined benefit pensions would result in,

“a £12,000 reduction in the value of pension income per affected member, on average over their lifetime”.

The Institute and Faculty of Actuaries believes that if a scheme were to change inflation indexes, a 65 year- old man who had been expecting pension increases in line with RPI could expect to receive aggregate lifetime pension payments about 10% to 15% lower.

Where do we go from here? The report notes that, in true “third way” style, the Government, the Bank of England and the UK Statistics Authority increasingly see CPIH, which includes owner-occupiers’ housing costs, as a preferred longer-term measure. However, the committee outlines how CPIH has faced problems since its introduction in 2013. It echoed the views of several witnesses, who raised concerns about the use of rental equivalence in CPIH and called for more work to be done before a single measure of inflation is identified and adopted.

It is clear that the Government are not yet in a position to fulfil the committee’s wish of selecting a single measure, but the proposed five-year timescale identified by the noble Lord, Lord Forsyth, and his colleagues appears sensible. Given the importance of inflation measures for the everyday costs of people up and down the country, I hope the Minister will be able to demonstrate that the Government now have a firmer grip on this issue than was suggested in their evidence to the committee.

--- Later in debate ---

[Lord Young of Cookham]

That goes to one recommendation directed at the UKSA. That issue will be addressed directly in the government response to the recommendations. I cannot give my noble friend an answer today; I hope that he understands why.

In introducing the debate, my noble friend wondered whether the Government discussing this issue with the UKSA somehow compromised the UKSA’s independence. It is perfectly legitimate for the Government to discuss matters with the UKSA without interfering with its independence in decision-making. We discuss a wide range of issues with it—as we should, given that the ONS is the producer of economic statistics. One can have that dialogue without encroaching in any way on the UKSA’s independence. The Government continue to discuss the relevant issues raised by the report; the Chancellor wrote to my noble friend last week, outlining that point. I stress to my noble friend, the noble Lord, Lord Sharkey, and other noble Lords that we are working hard to respond to the committee’s report as quickly as possible. We will communicate a date for this response in due course and will provide sufficient notice for the markets.

Let me move on to the central focus of the inquiry, namely the RPI. As the Government have stated before, we recognise that there are flaws in the way that RPI is measured and that, as a result, its rate of inflation is higher than that of other measures, such as the CPI and CPIH, which is the CPI including owner-occupiers’ housing costs.

The report from the committee is the latest in a series of reports on this intractable issue. I highlight this to stress how complex it is. In 2012, the then National Statistician launched a consultation on potential changes to the RPI following concerns about the increased wedge between RPI and CPI, which had been driven primarily by the 2010 change in the collection of clothing prices. There was then a considerable response, both on matters statistical and non-statistical, and in 2013 the then National Statistician responded, arguing that the RPI did not meet the highest standards expected for a national statistic. That answers the question of the noble Lord, Lord Lea, as to why it was regarded as discredited: the UKSA stripped the RPI of its national statistic status.

However, given its widespread use in the economy, the National Statistician argued that the RPI should remain unchanged. In 2015 a review into consumer price statistics, which had been led by Paul Johnson of the Institute for Fiscal Studies, was published. This also criticised the RPI and recommended that it should be classed as a legacy measure and that its use should be actively discouraged.

Let me explain the Government’s use of inflation statistics and highlight how they have not ignored the criticisms of RPI. Since 2010 the Government have reduced their use of RPI. They have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. More recently—this addresses the accusation of index shopping made by a number of noble Lords—in April 2018 the Government brought forward switching the indexation of business rates from RPI to CPI.

[Lord Tunnicliffe]

Did the Minister say that the state pension was linked to CPI? I thought it was triple-locked—I hope it is because I draw it.

[Lord Young of Cookham]

One of the locks is CPI.

[Lord Tunnicliffe]

My understanding of this part of my income is that it is the greater of CPI, RPI or, I think, 2.5%.

[Lord Young of Cookham]

We have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. If that is wrong, I am sure a signal will come from the far end of the Chamber to put it right before I sit down.

I was dealing with the issue of index shopping and said that in April last year we brought forward switching the indexation of business rates from RPI to CPI. This move is expected to save businesses almost £6 billion over the next five years—at, of course, a cost to the public purse.

At Budget 2018 we outlined our policy on inflation statistics. Specifically on RPI, the Government committed to not introducing new uses of RPI and to reduce its existing uses when and where practicable. I note that the report encourages the Government to move all uses to CPI. However, the matter of practicability is key and further moves away would be complex. It has not been clear in recent years which measure of inflation it would be appropriate to use, although that picture is now getting clearer.

One sizeable area where RPI is used is in the Government’s index-linked gilts—a number of noble Lords mentioned this, including my noble friend Lady Browning— which are indexed to RPI. The Government have no plans to stop issuing index-linked gilts indexed to RPI. As the demand for RPI-linked debt is vast in comparison to CPI, particularly from the pensions sector—the largest holder of gilts by sector—the taxpayer gets far better value for money issuing into this market. Until such time as we can be satisfied that there would be sufficient demand for a new debt instrument, and that it would deliver better value for money, we will continue to issue RPI-linked gilts.

As mentioned by the noble Lord, Lord Macpherson, demand for CPI-linked debt is growing. However, given that demand for RPI-linked debt is stronger, the Debt Management Office gets better value for money by continuing to meet this demand. However, in response to the noble Lord, Lord Macpherson, the issuance of new debt instruments is kept under review.

On the Government’s future use of inflation statistics, particularly in relation to CPIH, noble Lords have raised concerns over its suitability as a headline measure for the Government. Again, I pay tribute to the work of the ONS, led by John Pullinger. CPIH has undergone extensive development, choosing between different methodologies where necessary, and rigorous testing by the independent Office for National Statistics. This robust process has led to CPIH being approved as a national statistic, meaning that it is fully compliant with its code of practice for statistics. The Office for Statistics Regulation recommended to the board of the UKSA that CPIH be granted national statistic status, which is the highest kitemark of quality in our statistical system. Following this extensive development, at Budget 2018 the Government stated that their objective was for CPIH to become their headline measure over time.

The Government have not, however, set a date for CPIH to become their headline measure of inflation. This is because CPIH is a relatively new measure—a number of noble Lords touched on the issue of housing. CPIH has only recently been certified a national statistic, and it was only late last year that an updated historical back series was published, extending the series. With this back series in hand, work is now ongoing to understand its properties compared to CPI and RPI. The Government will regularly update Parliament on their progress towards using CPIH and, of course, on its broader strategy on inflation statistics.

Perhaps I may touch on some of the issues raised in the debate. The noble Lord, Lord Tunnicliffe, raised the benefits freeze. The decision to freeze most working-age benefits from 2016-17 was one of a number of difficult decisions that the coalition Government took to put the public finances back on track. We have no plans to repeat the freeze and we expect working-age benefits to rise with inflation from April next year.

The noble Lord, Lord Tunnicliffe, mentioned Sections 7 and 21 of the Statistics and Registration Service Act. Other noble Lords also mentioned the issue—the noble Lord, Lord Turnbull, in particular. We recognise the committee’s view on this and the Government will respond to the report in due course and on that specific recommendation. Changes to RPI are a matter for the independent UK Statistics Authority and the Office for National Statistics. That is a response to the suggestion that RPI could be incrementally corrected.

In conclusion, I recognise that I have not been able to go as far as noble Lords would have wished. The Government note that this report covers complex and wide-ranging issues, and makes a number of serious and sober recommendations to both the Government and the UKSA. Given the extensive use of RPI in the economy, the complex nature of some of those uses and their interactions, and, most importantly, the effect on people and the economy, the Government believe that it is necessary to take time to consider the committee’s report carefully before responding.

The Government recognise that RPI is a flawed statistic, and stress that they have not avoided acting on the issue. They recognise that further work must be done, but note that further moves away from RPI are complex. Further, the necessary work to prepare for CPIH is yet to be completed. I say to the noble Lord, Lord Sharkey, that the Government will respond as soon as practicable to noble Lords’ report and are working extremely hard so to do.

Finally, I will convey to the Chancellor the sense of frustration expressed by my noble friend Lord Forsyth and others about the time it has taken to respond to the report. I will personally relay that message.