The downgrade follows a request from the UK Statistics Authority in January that there be a statutory reassessment of RPI.
This re-assessment has now concluded and an Assessment Report was published on 14 March 2013, confirming that the formulation of the RPI fails to meet international standards.
The UK Statistics Authority has concluded that RPI statistics will no longer be designated as National Statistics. The ONS will continue to produce RPI figures.
Experts say the move could lead to DB schemes dropping RPI in favour of CPI as the index for inflation increases in benefits.
Ros Altmann, pensions consultant says: “If it is no longer considered to be a ‘National Statistic’, will pension trustees decide to stop using it for pensioner increases in future? This would need to be challenged in the Courts, but as it could represent a significant cost saving to many schemes, some trustees may decide to test this even when the Trust Deed specifies pension rises must be based on RPI.
“RPIuses an arithmetic mean to calculate the inflation figure, while CPIuses a geometric mean. There are also differences in the basket of goods used for each measure, but the statistical methodology for RPIwill normally result in the inflation figures calculated by RPI being higher than those under CPI. However, that does not mean that CPIis always a better measure of actual inflation than RPI. In fact, many of the responses to the official consultation suggested that the CPImethodology should be analysed more carefully, since it seems that the calculation of some items, particularly clothing, may have been under-recorded.
“It’s not clear what the ramifications of this will be, if any. It could be that there will be little impact, as the measure will still be calculated, even if it is no longer an official statistic. Ultimately, there is no ‘right’ measure of inflation – all the statistical measures are just estimates. The fact that RPIis higher than CPI can sometimes better reflect the reality of price increases faced by the population.
“Ultimately, however, this seems like the thin end of the wedge for the end of RPI as a UK measure of inflation. The ONS will continue to calculate it, but will also bring out new measures of RPI (such as RPIJ which will be based on the same methodology as the CPI) and it is likely that, over time, these new measures will gradually replace the traditional RPIitself.”