Inflation — House of Lords, 2019-07-01
Topic: Macroeconomics
Andrew Turnbull (Crossbench, Unknown): I said it does not. In other words, it fails the time reversibility test. If it goes up by 25% and then comes down by 25%, it ought to end up where it was before, but the price level is not the same. We believe that if the ONS is going to continue publishing the RPI, it should have a programme for addressing the flaws that have been identified The EAC then looked into the implications of having two rival price indices. It quickly became apparent that the Chancellor had spotted the opportunities for index shopping, as others have noted. The view of the committee was that it would be better to move towards a single index combining the best characteristics of both indices: neither on its own is superior in all aspects. There should be a rolling programme of improvements, starting with the clothing issue One area which will need to be addressed is the treatment of housing costs. Here, in my view, neither index has yet found an ideal treatment. The CPI takes no account of owner-occupier housing costs other than repairs. The RPI includes mortgage interest, but of the 27 million households there are only 10 million owner-occupier mortgages. The ONS seems to favour creating a housing element based on rental equivalence, but the rental market is very distorted. Clearly, there is some difficult technical work to be done to find the best solution, which can then be adopted by both indices, and as other differences are resolved a single general measure of inflation can emerge The final issue we addressed was the indexation of gilts. Holders of these gilts have benefited substantially from the changes, probably wrongly, which boosted the RPI. There is a clause in the prospectus of early issues that says that if a change is proposed which is materially detrimental, it can be made only with the agreement of the Chancellor. I began to wonder what fool came up with this "heads I win, tails you lose" arrangement, which allows gilt holders to keep any windfall gains but not suffer any correction when things went against them. Then I began to wonder whether it was me, many years ago when I worked on monetary policy in the Treasury. What to do next? Above all, we should not act precipitously but should give plenty of warning of our intentions. If, as recommended, a unified price index emerges, it should be applied to all indexed gilts issued. In the meantime, we recommended beginning the process of issuing CPI-indexed gilts. We were not convinced that issuing gilts with a different uprating formula would seriously fragment the market. For years, gilts have been issued with different coupons, maturities and tax treatments, and the market is big enough and flexible enough to find equivalent values for them. For existing gilts with maturities after 2030, the prospectus allows them to be linked to an index, "which continues the function of being an officially recognised index measuring changes in the level of UK retail prices" In other words, if the change proposed represents the best professional advice, that index should be used and there should be no veto if it comes out better or worse than the previous index. I have never quite understood why the change in respect of clothing, which was regarded as technical when it happened, is now possibly being regarded as a fundamental change as it is reversed It would be nice to close on an upbeat note—that all these problems are being addressed under a new team—but I understand that the search for a successor to the retiring National Statistician has proved fruitless and that the deputy has been asked to act as an interim. That is not a good sign The new "Big Brother" Clock, which I regard as, basically, an electronic version of the noble Countess, Lady Mar, is probably telling me it is time to wind up.