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Redefining the RPI downwards?
Dennis .
Posted: 04 November 2012 16:58:58(UTC)

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There is an interesting letter in Saturday's FT from someone who attended a meeting at the Office for National Statistics concerning "options for improving the RPI". The message he took away was that there is an intention to reduce the RPI to CPI levels by changing the formula and to implement it by March 2013. This has to be approved by the Chancellor but has all sorts of implications since it enables pension increases to be lowered as well as the effect on RPI related gilts and bonds and even FITs etc. Evidently we are currently in a consultation period. Scary stuff.....
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Guest on 05/11/2012(UTC)
Posted: 05 November 2012 13:22:37(UTC)

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As far as I understand it the ONS currently uses two different formulas to determine inflation rates for goods/services that are not easily measured directly, one for CPI and a different one for RPI. The reason for the review is they've apparently determined that there is a large different between the two indexes purely due to this effect.

The example they give is the difficulty in measuring inflation for apples given the number of types available. They therefore have to estimate based on an aggregate sample.

The existing method used for RPI is not considered to be best practice so all the consultantion aims to do is decide whether or not the CPI formula should be used or not for RPI.

If you take an impartial stance then it is a perfectly reasonable question to ask. Having a false high / low reading doesn't help anyone over the long run.

Obviously anything that reduces RPI where a particular benefit is linked to it will result in people not being happy. Unfortunately Governements over the years having used stealth mash and grabs raids as well as having engineered a population ignorant of all things financial / economical can now reap their reward of ever change being treated as suspect with some hidden agenda
Jeremy Bosk
Posted: 05 November 2012 13:38:50(UTC)

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Different groups of people have different inflation rates. Housing and transport costs vary wildly across the country. Old people generally have different spending patterns and needs than younger ones. People with children have different spending priorities than childless people and so on. We probably need a rather sophisticated set of indices to cover all the permutations. One size does not fit all.

Of course this might simply shift the argument towards which category someone should occupy.

PL makes a good point about popular ignorance and suspicion. I would disbelieve the stated aims of any politically inspired change but tend to accept a technical change originating from the statisticians.
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Clive B
Posted: 05 November 2012 15:53:22(UTC)

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I remember reading a somewhat artificial example in a paper a few weeks back. Involved just two times
-item A, initially £20, went up in price to £25, hence 25% increase
-item B, initially £25, went down in price to £20, hence 20% decrease

Article quoted that the way inflation was measured (don't remember which measure it was talking about) it would calculate inflation of the "basket" of two goods as (+25%-20%)/2, hence 2.5%. However, the basket of goods was still the same £45.

Though that's clearly a very simple and artificial example, if that's really how they calculate inflation I think it's wrong. Imo, the inflation on a basket of goods should be basically new price/old price expressed as a percentage and NOT some average of the inflation rates of the individual goods. That's how I'd measure my inflation - if a basket of goods were £100 one week and £102 the next, I'd say that was 2% inflation - I wouldn't go averaging the individual rises/falls in inflation.
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Posted: 05 November 2012 17:53:52(UTC)

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Apologies for being simplistic but I thought that the major difference btwn CPI & RPI was that CPI DOES NOT account for housing costs whereas the RPI DOES.

Of course, other than housing costs, there must be an improvement in calculations to better reflect the true nature of inflation in the UK and, as mentioned by others, its best done by able statiticians than by, er, "discerning polticians" who`ll swing it to best serve their own needs!
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Dennis .
Posted: 05 November 2012 18:00:03(UTC)

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You are all missing my point, it's not about methods of calculating inflation rates it's about the fact that the government appears to be sanctioning a redefinition of the methodology to reduce it's debt burden and effectively do a "soft default". When you buy an RPI linked financial asset you expect the methodology to stay constant. This is about changing goalposts. Why hasn't the financial press picked this up?
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Guest on 12/11/2012(UTC)
Posted: 05 November 2012 18:21:12(UTC)

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The CF Ruffer Total Return fund managers refer to this subject in their latest monthly statement (see below);

The other area where we have taken a dent to
performance has been in our holdings of very long
dated UK index-linked bonds. We were always very
aware of their capability of making large gains or
losses, precisely given their long duration; what we
had perhaps less expected was the short-term
damage they would sustain from the debates around
the measurement and calculation of Retail Price
Inflation (RPI) in the UK. Assuming there is a
recommendation from the Consumer Prices Advisory
Council to change the method of calculating the RPI
and, ipso facto, reduce it, (and the reasons and
arguments behind such a move resemble too much
the Schleswig-Holstein question to go into them
here), then the temptation for the Chancellor to
accept it will clearly be high given the immediate
interest and other savings on offer. Only one
problem; such a move could be perceived as a
default, and the existence and retention of the UK’s
AAA rating still shines strongly in Mr Osborne’s
firmament. We will watch this space, but at a time
when holding such positions has proved somewhat
frustrating, it is well worth reminding ourselves that
the reasons we hold these positions go well above
and beyond what we would ultimately regard as
short-term considerations.
Jim Dedicoat
Posted: 05 November 2012 19:44:10(UTC)

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There is another issue here, not really touched upon, except by one note:

I saved/contributed to a DB Pension scheme for many many years, with rises based on RPI figures

To me therefore, this is a CONTRACT, which is not open to politicians or anybody else to MESS with now.
I am quite sure, that if I did not keep up my payments, I would soon have been told about itor excluded from the scheme!

There are millions of people now on RPI inflation rated pensions, and there is no excuse for government to start messing with this, especially as they have, between them, managed to make our company pension system about the worst in Europe, when originally it was well known to be the best.

The great thing that has been forgotten here is that the Defined Benefit system means a pensioner uses part of the fund to provide his income until his death. At that point the funds become available for the next person. Admittedly with people living longer, the companies would still have to be paying in each year to keep up, as they always have done, but this is probably far easier to control than this stupid system of only being able to have a 5% surplus.
(The treasury thought they were loosing out on company taxation in the mid 90's and managed to get this through. I don't remember the papers or accountants screaming from the rooftops about it then either).
Each time the stock market goes down now the fund is in deficit and requires large inputs to bring it up to level again within a short timescale.

All this and they want to mess with it again, perrish th thought!!
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Brian Waters
Posted: 05 November 2012 22:42:41(UTC)

Joined: 11/11/2010(UTC)
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Public sector pension increases were downgraded from RPI to CPI about a year ago. I assume the same happened to MPs pensions - any bets?
Jim Dedicoat
Posted: 05 November 2012 23:55:03(UTC)

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You are probably quite right, but the private sector pensions as you know are a different scenario....other than politicians out to make sure no one else gets better than they do, even when it's us that is footing the bill.

Posted: 06 November 2012 08:21:39(UTC)

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Dennis: I think if you look at the details on the ONS website you will find that they themselves initiated the RPI review without being prompted by the Government to do so. They might have been lent on, but theorectically they are an independent body tasked with collecting official statistics.

Beantree: You are correct in stating there is a difference in RPI/CPI due to housing but the review being undertaken by the ONS is purely related to the difference between RPI & CPI that is generated by the way inflation for particular goods are calculated. Incidently they are looking to launch a new measure CPIH next year which includes owner occupier housing costs with the existing CPI.

Dennis .
Posted: 06 November 2012 09:29:50(UTC)

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PL " They might have been lent on" sounds a bit like the way that the Intelligence community was expected to produce the "right answer" to justify the Iraq war. After all who signs off the ONS budget?
Posted: 06 November 2012 21:16:12(UTC)

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Having worked in the past for an independent body in the public sector we were constantly lent on behind the scenes to look or not look at things by the Treasury and others. It was all very subtle - "you may want to take our views into account when deciding on x " As a result I came to the view that there is no such thing as what many would regard as true independence - there are too many players with influence/ views and who need to be listened to if an organisation is to survive.

Some will recall that when public sector pensions moved from RPI to CPI uprating, Ministers exhorted private sector schemes to do the same to reduce their liabilities, not realising that for many schemes the RPI increases are hard wired into the rules and could not be changed. Much head scratching later and presumably with CBI support Ministers could well be behind the latest wheeze. I doubt that the "independent" ONS could resist the pressure given the huge amounts of money at stake -£billions- but who knows.
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Jeremy Bosk
Posted: 07 November 2012 00:08:24(UTC)

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The only way we will ever find out if anybody is being lent on by government is if a whistle blower comes forward. That would have to be someone very brave, very angry or with another job offer already in the bag!

Until then I have no idea what the truth is.

I personally would avoid government debt whether indexed or not because I do not trust politicians. Any of them.
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