The Governor of the Bank of England has urged the Government to abandon the use of the retail prices index (RPI) as a measure of inflation, especially in the issuance of government bonds.
The intervention by Mark Carney could have profound implications for both savers and borrowers because RPI tends to run at 0.7 percentage points higher than the consumer prices index (CPI), which is increasingly considered to be a more reliable measure of inflation. Nevertheless, RPI is still widely used in government contracts.
“It would be helpful to have just one public-facing measure of cost of living for consumers,” Mr Carney told the House of Lords’ economic affairs committee. “At the moment we have the RPI, which most people acknowledge is of no merit, and CPI, which virtually everyone recognises and is the target in our remit.
“At some point it would be good to consolidate to focus on one [measure of inflation]”.
The change would mean that savers who invest in inflation-linked gilts would likely earn a lower return. With £311bn of such index-linked gilts in issuance, a 0.7 percentage point change in interest could save the Government in the region of £2.2bn per year.
There is no one measure of “inflation” so discussing which one we should use makes sense.
But there’s a significant difference between issuing new bonds which use the CPI and changing the old bonds in issue to use it.
Actually, I think it would be a great idea to issue the new ones using CPI. Then we can see, from he difference in market prices, what people think about it…..