Commuters and students hit by openly-admitted inflation flaw, warns report

Students and rail passengers are being unfairly penalised by an openly-admitted error in the way a key measure of UK inflation is calculated, a Lords committee has warned.

A report by the House of Lords Economic Affairs Committee has said the Office for National Statistics (ONS) must address the flaw or risk being in breach of its duties to safeguard the quality of official statistics.

The committee said the statistics authority’s refusal so far to correct the error is “untenable”, with the flaw in the Retail Prices Index (RPI) measure of inflation creating clear “winners and losers”.

It is estimated the error – which has artificially increased the rate of RPI – has boosted holders of inflation-linked government bonds to the tune of around £1 billion more a year in interest.

But it is costing commuters and students dear, as RPI is used to calculate annual increases in rail fares and student loan pricing.

The committee also called on the Government to agree to use a single measure of inflation to prevent “index-shopping” – where it cherry picks the measure that suits it best.

Lord Forsyth of Drumlean, chairman of the Economic Affairs Committee, said: “The UK Statistics Authority’s refusal to fix the problems it admits RPI has is untenable.

“By continuing to publish an index which it admits is flawed, it is arguably in breach of its statutory duty to promote and safeguard official statistics.”

He added: “This is not just a technical debate. The authority’s error created winners and losers.

“For example, commuters and students pay more because rail fare increases and student loan interest rates are linked to RPI.”

The committee claims the ONS openly admits the RPI error, but has refused to ask the Chancellor to approve a correction as it believes the Treasury will not want to upset financially index-linked gilt holders.

An ONS spokesman said the authority was aware of problems with the RPI, but confirmed it had still not written to the Chancellor to correct the error.

He said: “We agree the RPI has significant shortcomings.

“We will therefore continue to work closely with our counterparts in Government and at the Bank of England and respond to the committee.”

The RPI error has been caused by a change in 2010 to the way clothing prices were collected, which has widened the difference between the RPI and the Consumer Prices Index (CPI).

CPI currently stands at 2.1%, while the RPI rate of inflation is 2.7%.

The gap between the measures has encouraged so-called index-shopping, with the Government controversially switching from RPI to the lower CPI rate in 2011 for annual increases in benefits, tax thresholds and public sector and state pensions.

Lord Forsyth said: “When the Government gives money to people it is generally opting to adjust payments for inflation using the CPI.

“But when it takes money from people, it is generally opting to use the RPI, which has been around 1% higher than CPI in recent years.

“This simply is not fair.”

The report, entitled Measuring Inflation, was prompted by a suggestion from the Bank of England governor Mark Carney in a meeting with the committee a year ago.