UK Markets open in 3 hrs 29 mins

Flawed UK inflation statistics hand investors £1bn-a-year bonanza

Tom Belger
Finance and policy reporter
HM Treasury building in London: the Treasury has said it can’t fix the issue as the official statistics body hasn’t yet asked it to. Photo: Matthew Lloyd/Bloomberg via Getty

Investors are enjoying a windfall of about £1bn a year because of flaws in the UK’s official statistics, a damning report has found.

An error in how inflation was calculated in 2010 gifted government bondholders the huge sum at a stroke in higher interest payments, according to the House of Lords economic affairs committee.

The government has refused to fix the problem ever since despite admitting the statistics are flawed, a position described by peers as “untenable.”

The failure has not only handed index-linked bondholders an unexpected annual bonus, but also heaped additional costs on other groups affected by official inflation figures.

Rail passengers and graduates have been forced to pay 0.3% more every year in fares and student loan repayments, which rise in line with increases in the retail price index (RPI) measure of inflation.

“We do not see why a windfall is acceptable but a loss is not,” the report said.

READ MORE: Will higher fares pay for increased bonuses for rail chiefs?

Lord Forsyth of Drumlean, chair of the committee, said the UK Statistics Authority’s unwillingness to resolve problems with the RPI had “created winners and losers”, and accused the body of breaching its duty to use high-quality statistics.

He also said the government was guilty of “index-shopping”, using measures because they suited the public finances rather than because they were the most reliable.

“When the government gives money to people it is generally opting to adjust payments for inflation using the consumer prices index (CPI).

“But when it takes money from people, it is generally opting to use the retail prices index, which has been around 1% higher than CPI in recent years. This simply is not fair,” Lord Forsyth said.

READ MORE: Inflation set to fall within a whisker of Bank’s target

The error arose when officials realised that the RPI had underestimated clothing price increases and tried to correct the problem in 2010.

Their revised inflation measure then also turned out to be flawed, providing significantly higher estimates than the other most commonly used measure of CPI.

The statistics body accepted the new RPI measure was flawed and had relegated it in status by at least 2013. Yet more than five years later, RPI is still being used to justify higher interest payments to the holders of index-linked gilts, which make up about a quarter of UK government bonds.

The committee heard evidence from Chris Giles, economics editor of the Financial Times, who calculated that increased interest payments helped investors take home an extra £1bn a year.

The UK Statistics Authority could correct the error, but told peers they had not even asked the chancellor’s permission to do so as “they expected he would say no” to a change that left bondholders worse off.

Rail passengers faced higher fares because of flawed inflation statistics. Photo: Kirsty O’Connor/PA Wire/PA Images

It also said it feared “complex and time-consuming” legal issues, after investment firm and pension fund representatives argued changes would be unfair to existing bondholders.

The government’s debt management office also argued it would get a lower price for new bonds linked to a lower inflation measure, but the committee said demand was high enough to make them viable.

Meanwhile the Treasury told peers they could not fix the issue because the statistics body had not asked them to.

The committee’s report urged the government to fix the error immediately, using the lower CPI measure instead until a new, single inflation measure has been agreed for the future.