LONDON (Reuters) - Britain’s top statistician unexpectedly decided against a major change to the country’s longest-running inflation index on Thursday, a move that could have significantly cut government borrowing costs.
Instead, National Statistician Jil Matheson recommended the creation of a new index that uses improved statistical techniques, but this will not affect existing index-linked gilts and pensions that are linked to the long-standing Retail Price Index (RPI).
“There is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds,” she said.
Matheson did recommend a change to the data used for private housing rent in RPI, which will be subject to consultation with the Bank of England, but this is not expected to change the level of RPI.
Most economists had expected RPI to be changed significantly to make it more similar to the consumer price index (CPI) targeted by the Bank of England, which typically is significantly lower due to different statistical techniques.
Instead, the decision to keep RPI as it is means there is likely to continue to be an average 1.3 percentage point gap between RPI and CPI, based on estimates by analysts at Deutsche Bank before the decision was made.
If RPI had changed, it could have saved the government as much as 3 billion pounds in debt interest a year out of total debt servicing costs of 47 billion pounds, according to Scotiabank economist Alan Clarke.
However, a change to RPI was opposed by some groups representing older people, as many company pension payments are linked to RPI, and the change would have lowered future payments.
The decision not to change RPI is also likely to raise the price of index-linked gilts.
Britain’s next auction of an index-linked gilt takes place on January 17, when it will sell 1 billion pounds of the 2029 index-linked gilt.
Annual RPI inflation was 3.0 percent in November, compared to 2.7 percent for CPI, reflecting a recent narrowing in the gap between the two measures due to differences in how changes in insurance and mortgage interest payments are accounted for.
However, most economists believe this narrowing is temporary, and the Office for National Statistics, which produces the data, estimates there is an underlying difference of about 1 percentage point between RPI and CPI due to the formulae used to calculate them.
This difference widened from around 0.5 percentage points in early 2010, prompting the ONS last year to start looking at whether the formulae used to calculate RPI - which are avoided by many other countries - still represented good practice.
In November, BoE Governor Mervyn King put his weight behind a change, saying RPI was “using some rather outdated methods”.
Reporting by David Milliken and Olesya Dmitracova