Bank of England governor Mark Carney has called for an end to the use of RPI – the discredited inflation measure still used to calculate rail fare hikes and student loan interest payments.
Mr Carney told peers he wanted the Government to stop issuing bonds – parcels of debt – linked to the Retail Price Index (RPI) within the next seven to ten years.
He also told the Lords Economic Affairs Committee that new public sector contracts should be moved as soon as possible to a more up-to-date measure such as the better-known Consumer Price Index (CPI) measure of inflation.
Mr Carney said there were “known errors” in RPI – errors acknowledged by the Office for National Statistics (ONS) which publishes the monthly figure.
He also said it would be helpful for there to be just one “public-facing” measure of inflation.
RPI, which includes housing costs, is prone to volatility and no longer classified as a national statistic.
But it is still widely used in setting some key regulated price increases, including rail fares as well as water bills.
RPI has tended to be higher than CPI. It was measured at 4.1% in December, compared to 3% for CPI.
A third, newer measure, preferred by the ONS, is CPIH.
The Bank still prefers to use CPI for its 2% inflation target.
Mr Carney said: “It would be helpful to just have one public-facing measure of the cost of living for consumers.
“At the moment we have RPI, which most would acknowledge has no merit; we have CPI, which virtually everyone recognises and is in our remit; and we have the ONS favourite CPIH, which includes housing costs.”
He said that while new public sector contracts could start shifting to a different measure as soon as possible, issuance of gilts, or Government bonds, would need to be phased in over a longer period.
Mr Carney said: “We’re still issuing on RPI, and yes, there is a short-term argument that of course it’s better to continue issuing on RPI.
“But we wouldn’t want to be in the same position ten years from now.
“In the end, you have to pick a date, and it tends to be seven, eight, ten years down the road, at which you will have transitioned off.”
The UK’s Debt Management Office, which issues gilts, rejected a move to CPI in 2011 after consulting investors.
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These investors include British pension funds, which have liabilities that they must meet which are also RPI linked.
Others did not want to fragment the market by seeing another class of debt introduced.