The government will keep using flawed inflation statistics to calculate price rises for things like rail fares, student loan interest rates, and cigarette duties, the chancellor confirmed on Wednesday.
Sajid Javid chose one of the most tumultuous political weeks of the year to quietly confirm news that the government will continue to use the retail price index (RPI).
RPI is used to calculate annual changes in regulated rail fares, road tax, duties charged on tobacco, alcohol, and flights, student loan interest rates, and many other items.
The move is likely to leave commuters, graduates, and smokers worse off, with above inflation price rises now likely for at least the next five years. Labour claimed last year that the use of RPI had left graduates thousands of pounds in extra debt.
Javid made the announcement in a letter to UK Statistics Authority chief David Norgrove, who had urged the government to stop using or reform RPI. Norgrove has said it is “not a good measure of inflation” and it lost its kitemark as a recognised national statistic six years ago.
Javid said he wouldn’t overhaul the system because of “the government’s focus on Brexit” and the likely disruption any reform would case.
Norgrove wrote to Javid’s predecessor Philip Hammond in March calling for a rethink after a critical House of Lords committee report said RPI created “winners and losers.” Norgrove said the statistic’s continued use “sits uncomfortably” with the stats body’s legal duty to publish reliable statistics.
RPI’s flawed calculations of inflation have been generally higher than under the more respected consumer price index (CPI) measure since 2005.
Peers accused the government of “inflation shopping,” using the lower CPI measure to calculate many payouts to the public such as benefits, but using the higher RPI measure to calculate what the public have to pay.
One exception is government bondholders, who still receive a bonus of an estimated £1bn a year because their payments are linked to RPI. Peers said in their report they “do not see why a windfall is acceptable but a loss is not,” suggesting rail passengers and graduates were paying 0.3% more every year. Some pension schemes are also linked to RPI.
Javid admitted in a letter published on the government’s website on Wednesday that the continued publication of RPI “could be seen to undermine the integrity of the UK statistical system.”
But he said ending its use would “potentially be highly disruptive”, which could in turn prove “damaging to the economy and the public finances.”
Javid said he was “unable to consent” to changes any earlier than 2025, but pledged a consultation from January 2020 and ruled out extending the use of RPI any further.
Paul Johnson, director of the Institute of the Fiscal Studies, said the announcement would be “big news” in normal circumstances, as RPI is “wrong and overstates inflation.”