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RPI calculation to remain unchanged, ONS decides

The way Retail Prices Index (RPI) is calculated should be kept unchanged, the ONS has recommended in a shock decision.

It was expected that National Statistician Jill Matheson would change the way RPI is calculated as a measure of inflation.

The recommendation has major implications for rail fares, pensions, water bills and even national debt. RPI is also used to calculate student loan repayments.

RPI has “significant value” for investors and pensioners, the ONS stated, although part of the index is flawed. A new index, RPIJ, will be developed to address an issue with the way clothing prices are measured and will start in March. RPIJ will replace the Carli formula with Jevons, and is envisaged to run alongside existing RPI.

It had been expected that the ONS would recommend a calculation that would have the effect of lowering RPI by 0.9 percentage points, in line with how Consumer Prices Index (CPI) is calculated.

This would have been a boost for Chancellor George Osborne, potentially saving billions of pounds. But keeping RPI unchanged could protect pensioners from a so-called ‘stealth attack’.

The ONS said there is value to users “in maintaining the continuity of the existing RPI’s long-term series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations”.

“Therefore, while the arithmetic formulation [of the RPI] would not be chosen were ONS constructing a new price index, the National Statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged.”

Final approval for the decision sits with the Bank of England and ultimately the Chancellor.

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