RPI unchanged but new index introduced

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Jil Matheson
The national statistician, Jil Matheson, has recommended that the formulae used to produce the RPI (Retail Prices Index) should remain unchanged, despite stating that one of the arithmetic average formulae used (the Carli)  does not meet international standards.
Jil Matheson cited the ‘significant value to users in maintaining the continuity of the existing RPI’s long time series’ and recommended that RPI continue unchanged so that it can continue to be used for long-term indexation and for index-linked gilts and bonds.
Explaining that the arithmetic formulation in question would not have been chosen were the Office for National Statistics (ONS)  constructing a new price index, Matheson also announced that a new index, the RPI-J, would be published as of March 2013. The RPI-J will use a geometric formulation, known as the ‘Jevons’ formula, for items where the ‘Carli’ is currently used (around 27% of the total).
The announcement follows a consultation launched last year to specifically address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI).
The national statistician also made it clear that the ONS will continue to pursue its research programme in the area of consumer price statistics working with users. This has been particularly welcomed by the RSS in its response to the announcement. The ONS has been carrying out an extensive research programme into the issue since 2011 and the RSS feels it is particularly important that this continues, stating: ‘The formula effect generally, and particularly in the case of clothing, is dependent not just on the choice of index but also on the characteristics of the price movements and levels being measured, sample design, choice of base period and price collection methods.’
The RSS also welcomes the UK Statistics Authority decision to review the governance arrangements and structures supporting the production of price indices to ensure that these statistics best meet user needs in the future.
The national statistician has also recommended that an alternative data source be used to measure private housing rents from February 2013 RPI indices (published on 19 March 2013). This change is subject to consultation with the Bank of England and the chancellor of the exchequer.

Reactions to the announcement (added 15 January 2013)
The announcement was a surprise to many commentators, some of whom acknowledged the benefit of keeping RPI the same. In his Financial Times column, David Keohane wrote that the decision was ‘an understandable one, if only because consistency has a definite and obvious merit.’
The move was also welcomed by those in the pensions sector. Ian Cowie, head of personal finance at the Telegraph, commented: ‘The ONS has demonstrated its independence and delivered good news for private sector pensioners. This should also be a good day for the price of linkers in the bond markets.’
However, there have also been critics. Stephanie Flanders, economics editor at the BBC commented: ‘Britain’s Office for National Statistics has decided, when it comes to inflation, it’s better to be consistent than to be right.’
Chris Giles, economics editor of the Financial Times and who serves on the Consumer Prices Advisory Committee, was also disappointed by the announcement. ‘This decision means the UK remains with a central statistical measure that is deficient.’ he remarked in his column.


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