Inflation

Lord Suri Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Suri (Con)]

My Lords, I pay tribute to my noble friend Lord Forsyth, who has been a doughty campaigner on this critical issue.

It is a universally acknowledged fact that inflation is not a glamorous topic; nevertheless, it runs through and buttresses almost all our spending activities. From Treasury bonds to train tickets, inflation is a vital measure by which pricing is calibrated. For all regulated prices, index inflation is the benchmark by which standards are set.

Sadly, in 2010 we made a foolish error, the difficulties of which we are still grappling with. A mistake crept into the retail price index as the standard measure of inflation. RPI is itself flawed for a multiplicity of reasons, many of which are elegantly pointed out in this report. The fundamental point, however, is that RPI, as currently calculated, tends on the whole to penalise those who earn their money and advantages passive investors. Since RPI is in almost all cases higher than the consumer price index, the winners are those who hold bonds or have invested in benchmark-linked indices. The losers are those who suffer high water bills or see the cost of their train tickets go up year after year. Chris Giles of the Financial Times, who has done excellent work on this, has estimated that bondholders have benefited by £1 billion a year since 2010.

I welcome the Treasury’s efforts to diversify away from RPI, but this work needs to be accelerated to cut off the fleecing of the British public. The Treasury’s response to concerns raised some time ago was questionable. When asked to justify its continued use of RPI in the Budget, the response was that it was “complex and potentially costly” to the Exchequer to move away from RPI. But what of the consumers who were negatively affected?

The Government’s priority should be the welfare of citizens, and it is hard to shake off the sense that this might have been overlooked. It is certainly concerning that the Government should take money from people on an RPI basis and give it out on a CPI basis. Index shopping as a method of regulating spending undermines public confidence in public spending and gives rise to a justified sense of grievance. If every public body which made an error to its advantage refused to fix it, public confidence in the administrative state would collapse altogether. Does the Minister consider this a justifiable trend?

I accept that there are legitimate concerns over such a move. Some in finance have come to rely on high returns. However, the concerns over RPI have been clear for so long that reform must be priced into the models of those who work with bonds daily.

Some make the case that it could cause hardship to those exposed to index-linked gilts, but it is a clear term of all gilts, and written into the purchase contract, that the index need not be of a particular type but one that is recognised by the Treasury and the Office for National Statistics. Ultimately, this is down to the ONS and Treasury to fix, but the ONS has a duty to promote and safeguard the quality of official statistics. Until this is fixed, we might be forgiven for thinking that it is failing to carry out one of its core mandates. Will the Minister commit to a rapid phase-out of RPI in the next economic Statement?