UK students and rail-users penalised by flawed inflation measure
London Briefing: Three figures for UK inflation depending on method used
Debenhams gave no update on current trading as it announced the cash injection but there was some relief it was not accompanied by another profits warning. Photograph: Reuters
What’s the rate of inflation in the UK? Is it as high as 2.7 per cent? Or is it 2.1 per cent? How about 2 per cent exactly? The correct answer is actually all three figures, depending on which method of calculation is used.
The higher figure of 2.7 per cent is calculated according to the Retail Prices Index (RPI), while the other two are based on the Consumer Prices Index - 2.1 pe cent excluding housing costs (CPI) and 2 per cent including housing (CPIH).
For decades, RPI was the key indicator of the cost of living. Six years ago, however, fundamental errors were uncovered in the way it calculates inflation on clothing prices, with a flawed formula that had the effect of overstating RPI by about 0.3 percentage points in 2010.
Despite this, the government has persisted in using the measure – when it suits – seemingly impervious to a growing chorus of complaints from economists, statisticians and consumer groups.
The prospect of finally saying RIP to RPI looked a little brighter yesterday as peers and MPs joined forces to demand that the UK Statistics Authority (UKSA) end what they called the “absurd” use of the flawed indicator.
In a joint letter to UKSA chief John Pullinger – copied to chancellor Philip Hammond – the parliamentarians reminded the number-crunching body of its legal duty to “promote and safeguard the quality of official statistics”.
“In continuing to publish a statistic which you openly admit is flawed, we fear you may be in breach of this statutory duty,” they wrote. If RPI can’t be scrapped altogether, then at least it should be fixed, they argued.
It’s not hard to see why the government has been dragging its feet on RPI – it’s a very handy revenue-raising tool. For example, when the rate of interest for student loans or increases in rail fares are calculated, the higher RPI rate is used.
But when the government has to make inflation-related payouts, such as welfare benefits, it tends to prefer the lower CPI measure, an approach that has been dubbed “inflation shopping”.
Students and rail-users are the biggest losers from the continued use of RPI – but there are also some big winners. Holders of index-linked government bonds, or gilts, are estimated to have enjoyed an annual windfall of £1 billion from having their investments linked to RPI.
This is one of the key problems with scrapping the measure, as the last RPI index-linked gilt will not mature until 2068; until then, the government is obliged to make those payouts.
If RPI can’t be killed off, then at least it could be fixed, although that is proving difficult too. Lord Forsyth, head of the Lords’ economic affairs committee, blasted the inaction over RPI as “a ridiculous merry-go-round”. He said the statistics body had not asked the chancellor to approve fixes to RPI “because they expected he would say no.” And when the treasury was questioned, it said it could not act “because no request had been submitted.”
Meanwhile, the latest inflation figures, for January, will be released this morning. CPI is expected to fall to a two-year low of 2 per cent. RPI will, of course, be higher.
Lifeline for Debenhams
The good news for investors in Debenhams was that the shares soared almost 30 per cent yesterday. The bad news is that still left them languishing at just 4p, reflecting the parlous state of the department stores chain.
At this level the group is valued at little more than £50 million, compared with its peak of £1.7 billion in 2006.
Behind the leap in the price was confirmation that the retailer has secured a £40 million lifeline from its banks and bondholders. It’s welcome news and will give the group some breathing space but its troubles are far from over.
A full scale refinancing is still required and it needs to push through a store closure programme. Debenhams currently has 165 outlets, including half a dozen in the Republic and two in Northern Ireland.
The heavily indebted group has already said it plans to close 50 stores over the next three to five years and there has been speculation that up to 20 could close this year.
Debenhams gave no update on current trading as it announced the cash injection but there was some relief it was not accompanied by another profits warning. And there’s no word yet from nearly 30 per cent shareholder Mike Ashley, who last year offered Debenhams a £40 million interest-free loan. The move would have given the Sports Direct boss status as a secured creditor but was firmly declined by the Debenhams board. Fiona Walsh is business editor of theguardian.com