Inflation — House of Lords, 2019-07-01
Topic: Macroeconomics
Nicholas Macpherson (Crossbench, Unknown): My Lords, I declare an interest: in two weeks’ time, I begin to receive a Civil Service pension that will be uprated by the consumer prices index I congratulate the noble Lord, Lord Forsyth, and his committee on a rigorous and high-quality report, and on securing this timely debate. Public confidence in statistics is essential in a liberal democracy. I recall the words of Sir Michael Scholar, the first chairman of the independent UK Statistics Authority, who, incidentally, was appointed by the noble Lord, Lord Darling. He said: "For me, good statistics is like sound money or clean water, it is an absolute necessity and if you do not have it things go seriously wrong" When it comes to economic statistics, measuring the rate of inflation is perhaps the most important statistic of all. Maintaining the value of a benefit, tax or charge has been hardwired into our social system since the Rooker-Wise-Lawson amendment of 1977 I fully recognise that estimating the overall price level at any time is not easy, and I have considerable sympathy with the statisticians at the Office for National Statistics who must wrestle with this problem. Nobody has the same spending pattern. Expenditure tends to vary with age and income. Consumer habits and technological innovation mean that spending patterns are continually evolving. There is also a regional dimension, in that a lettuce will inevitably cost more on Uist than in Kent. I was Permanent Secretary to the Treasury when the UK Statistics Authority, on the advice of the National Statistician, withdrew the retail prices index’s status as a national statistic in January 2013. At that time, it seemed that the RPI’s days were numbered. I knew that there would be a transition before the ONS and the Government alighted on a new arrangement, but six and a half years on I am surprised at how little progress has been made. I can understand the Treasury dragging its feet. At a time of fiscal consolidation, index shopping was helpful if, as the noble Lord, Lord Forsyth, pointed out, opportunistic, but there comes a point where such an approach damages the wider credibility of government policy, and we are now past that point I thought the UKSA handled the issue in textbook fashion in 2013, but since then it has been less sure-footed. It is no longer credible for the UK Statistics Authority to hide behind the Government. It needs to be clear about what is the best measure of inflation, and it needs to move the retail prices index into line with that measure Personally, I think the committee has been rather too kind to the RPI as currently constituted. It is not just the clothing formula which is the problem; it is the use of the Carli formula more generally. No other country uses it. Canada dropped it for sound reasons in 1978. Everybody else, with the exception of Slovenia, uses the Jevons formula. As Paul Johnson said in his 2015 review, "Carli should not be used in any index aiming to achieve a good estimate of changes in consumer prices", and further it, "is not suitable for use" Dr Ben Broadbent in his evidence to the committee reinforced the case against Carli saying that its failings, "have been evident for a century" I know this country welcomes exceptionalism, but we really ought to adopt international best practice. I would therefore advise against keeping the Carli index on life support. It is better to put it out of its misery once and for all Dropping Carli will have big implications for people who use the RPI. Having criticised the UK Statistics Authority for slowness, I should give it credit for its approach to consultation hitherto, and I hope it will consult further as and when—I hope it is soon—it reaches a definitive view on the way forward. I recognise that the UKSA is independent of government, but I would be grateful if the Minister could confirm that consultation lies at the heart of the UKSA’s and the Government’s strategy when it comes to change A reformed index would mean a transfer of resources to rail travellers and graduates with outstanding loans. The Government, understandably, have not recognised these groups as priorities hitherto, given competing calls on taxpayers’ money, but it is always open to the Government to change the relevant uprating formulae, just as they introduced the triple lock to underpin the state pension This brings me to the vexed issue of index-linked gilts. My recollection is that this was the swing factor when the Carli problem first emerged in 2013. I can see why the Treasury and the Debt Management Office do not want to disrupt the gilt market—it is to their credit that it is one of the most efficient markets in the world—but here the committee’s report is persuasive. First, whether or not the ONS changes the basis of the RPI, the market is sufficiently big—and it is likely to get bigger with current spending proposals—to be able to bear CPI-based issues existing alongside gilts indexed to the RPI. As the committee’s report makes clear, there are only three index-linked gilts left with a requirement that the Treasury buys them in at par if there is an index change. All will have expired by 2030, and even if the Government had to buy them in, I do not believe that would prove too disruptive, not least because at current prices few, if any, holders would want to exercise the option I urge the UK Statistics Authority and the Treasury to act. Maintaining the status quo is increasingly untenable.