LONDON (MNI) – A report from an international expert, commissioned
by the Office for National Statistics, has recommnded axing a formula
used in the retail price index in a move which could substantially lower
the RPI.
While the proposed changes are technical in nature, lowering the
RPI has a potentially substantial impact on index-linked gilts and the
cost of UK debt payments. The report issued Monday, from Walter Erwin
Diewert, comes out firmly in favour of scrapping the Carli formula.
The summary of Diewert’s report says its “most important
recommendation for improvement is … the Retail Price Index (RPI)
should drop its use of the Carli index as an elementary index and
replace it by either the Jevons or the Carruthers Sellwood Ward and
Dalen elementary index.”
The Carli formula is an average which has led to RPI clothes
inflation being markedly above its equivalent in the CPI.
Alan Clarke, economics director at Scotia, has noted that scrapping
Carli could drag RPI down 0.3% year-on-year forever, although obviously
the effect is dependent on the choice of its replacement.
Diewert, who made his name with ground breaking work on Leontief
cost functions, was commissioned to produce today’s report as part of
the review into changes to the RPI.
The Consumer Price Advisory Council, which includes Bank of England
Monetary Policy Committee member Martin Weale among its members, will
make the final recommendation RPI changes after the consultation period
ends and the BOE will have to rule on potentially adverse impacts for
holders of index linked gilts.
–London bureau: +4420 7862 7491; email: drobinson@marketnews.com
wwilkes@marketnews.com
[TOPICS: M$B$$$,MFBBU$,M$$BE$]
