Technical Matters: Changes to Inflation Index – Introduction of CPIH in March 2013

The Office for National Statistics (ONS) has recommended a change to the way in which the Retail Prices Index (RPI) is calculated in order to bring the inflation measure more in line with international standards, they report.

However in making this recommendation, ONS recognises that the RPI is in fact used widely for measuring inflation related benchmarks such as index linked gilts and other inflation proofed instruments and other indicators using the RPI benefit from its long standing history of inflation measurement and trackability.

In considering this ONS has conceded that it is best to leave the existing measure of RPI in place and unaltered but instead to create a new measure based on the Consumer Prices Index (CPI) which also includes a measure of the cost of housing, renting and living in property – this new measure will be called CPIH and is to be introduced in March 2013.

The following is extracted from the Background Notes to CPI and RPI inflation measures produced by the Office for National Statistics and can also be accessed from ONS website www.ons.gov.uk:

  1. National Statistician’s announcement on the RPI consultation

Following a consultation on options for improving the Retail Prices Index (RPI), the National Statistician, Jil Matheson, has concluded that the formula used to produce the RPI does not meet international standards and recommended that a new index be published.The National Statistician’s consultation was prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI). The ONS research programme found that use of the arithmetic formulation (known as the ‘Carli’ index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI, and, that this formulation does not meet current international standards. Therefore, a new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ, in place of the Carli.In developing her recommendations the National Statistician also noted that 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 in accordance with user expectations.

Therefore, while the arithmetic formulation would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged. The Board of the UK Statistics Authority has accepted these recommendations.

The National Statistician has also recommended that improvements to the measurement of private housing rents from using an alternative data source should be implemented in the February 2013 RPI, CPI and CPIH indices (published on 19 March 2013). The Board of the UK Statistics Authority has accepted this recommendation and the Bank of England has confirmed that changing the data source for private rents does not constitute a fundamental change to the RPI and is not likely to be materially detrimental to the holders of index-linked gilts. Therefore, the change will go ahead.

2.   New inflation index including owner occupiers’ housing costs to be launched

On 2 November, ONS announced that a new additional measure of consumer price inflation will be launched which includes owner occupiers’ housing (OOH) costs. The new index, which will initially be known as CPIH, will measure OOH costs using the rental equivalence method. This method uses changes in rental prices to measure the costs of owning, living in and maintaining a property. CPIH will be introduced in March 2013 at the same time as the annual CPI/RPI basket of goods and services is updated.

Update: 23rd March 2013:

A new measure of consumer price inflation (initially known as CPIH) including owner occupiers’ housing costs has been launched in March 2013. The CPIH 12-month rate stands at 2.6% in the year to February 2013, up from 2.5% in January.

Additionally, a new Retail Prices Index-based index using a geometric formulation (known as the Jevons formula) has also been launched. The 12-month rate for this index, known as RPIJ, stands at 2.6% in February compared with 2.7% in January.

CPIH is currently designated as an experimental statistic and is being assessed for National Statistics status. The assessment is expected to be completed by the summer of 2013.

Source: Office for National Statistics

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[Published 16th February 2013 – additional inflation & background explanatory information update added 23rd March 2013]