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1/X) Tomorrow, Government & UK statistics Authority respond to @LordsEconCom report on RPI. A quick thread...
@LordsEconCom 2/X) The Committee believes law requires UKSA “to attempt to fix the issue with clothing prices”. This change would have to be approved by the Chancellor.
@LordsEconCom 3/X Background: A 2010 change to clothing price collection exacerbated the effect of using a formula in RPI which, experts say, overstates inflation. This added c0.3%pa to long-term RPI inflation.
@LordsEconCom 4/X) It’s not 100% clear what change Cttee had in mind. It hinted at changing clothing price collection but @jathers said he didn’t know whether it would be possible to wind back the clock. This may also have adverse effects for CPI.
@LordsEconCom @jathers 5/X) Alternatively, could change formula for clothing only (which ONS rejected in 2013), or exclude all/some clothing from index (but odd to exclude things people buy if trying to build trust).
@LordsEconCom @jathers 6/X Clear from ONS evidence that they didn’t like part-fixes. Prefer either big change to turn RPI into what they regard as a good inflation measure like CPI (e.g., change formula beyond clothing & coverage) or leave as is for legacy users.
@LordsEconCom @jathers 7/X) Cttee also called for govt to adopt single measure of inflation for all purposes. New index-linked gilts would be linked to CPI initially, then this. Didn’t seriously examine whether this would be better value for taxpayer than continued RPI-issuance.
@LordsEconCom @jathers 8/X) Committee said Government could then consider whether further changes to RPI should see it *gradually* converge on single measure.
@LordsEconCom @jathers 9/X) So people with RPI-linked contracts (gilt investors, DB pensioners, annuitants) potentially lose from short-term change and more from long-term change. The short-term loss reverses a windfall some of them received in 2010.
@LordsEconCom @jathers 10/X Taxpayers would gain (lower interest payments on existing gilt stock), as would people with RPI-linked student loans. Commuters gain in theory but lower fares may be capitalised into higher house prices.
@LordsEconCom @jathers 11/X) No idea how Govt sees the politics of this. However reasonable, reducing the value of a few million people’s RPI-linked pensions may not be the obvious thing to do before a likely election (if they understand it and hear it through the Brexit/Spending Review noise).
@LordsEconCom @jathers 12/X) But saving on ILGs would help with new spending commitments. Govt may or may not worry about how this would affect investors’ view of UK as a reliable creditor.
@LordsEconCom @jathers 13/X) While Defined Benefit members would either lose or be unaffected, it’s not the case that sponsoring employers can only gain. Most obviously, schemes with CPI-linked liabilities but holding RPI-linked gilts would see deficits widen.
@LordsEconCom @jathers 14/X) Typically (not always), schemes link increases to RPI in payment & CPI in deferment. For these schemes, gains/losses depend on amount of inflation hedging. Counterintuitively, the asset loss may often be slightly bigger than the liability saving.
@LordsEconCom @jathers 15/X) However, well-hedged schemes have done better from recent market movements. And the picture may be better vs long-term targets than vs funding/accounting liabilities (same asset loss, bigger liability saving).
@LordsEconCom @jathers 16/X) Of course, some probability of change should already be priced in by gilt markets.
@LordsEconCom @jathers 17/X) Some DC savers could lose where they hold ILGs via bond funds.
@LordsEconCom @jathers 18/18) Cttee painted a Kafka-esque picture: statisticians don't propose changes they think Chancellor would veto; HMT won't consider proposals that haven't been made. In reality, this would always be co-ordinated, with politicians having to own decisions with big £ impacts.
