In one of his last acts as Chancellor, Sajid Javid announced that a joint consultation between the Government and UK Statistics Authority (UKSA) will launch at the Budget on 11 March. The consultation will address a proposed change to the Retail Price Index (RPI), which has long been perceived as flawed.
After launching, the consultation was due to remain open for six week, until 22 April, with a response due to be published before the Parliamentary Summer recess. However, whether this is still the case following the recent Cabinet reshuffle and the Chancellor’s resignation, remains to be seen.
The UKSA has been pushing for a change to the use of RPI for some time. It sees RPI as at times either significantly overestimating or underestimating inflation and has urged the public and private sectors alike to not use it.
Suggested changes to RPI
In September 2019, Sir David Norgrove, Chair of the UKSA wrote to the then Chancellor to recommend that the publication of RPI should be stopped in the future, and in the meantime, its shortcomings should be addressed by aligning it with the Consumer Prices Index (CPI) but including owner occupiers' housing costs (CPIH).
While acknowledging flaws in RPI, the then Chancellor rejected this proposal, saying that ending the publication of RPI could be damaging to the economy and public finances. However, he accepted the notion of aligning it with CPIH, providing this did not happen before February 2025. This alignment and its timing is what the upcoming consultation is due to address.
A complex situation
RPI is generally higher than the main CPI measure of inflation, and CPI is seen as a better guide to inflation. In addition, CPIH is usually 0.7% to 1% below the value of RPI. As such, rent review calculations which are linked to the RPI are often preferred by landlords.
To further complicate matters, index-linked gilts, swaps, annuities, pension increases and inflation-linked commercial property are all measured against RPI. Any change to the RPI will therefore need to take into account the potential impact to the above.
Although it now seems likely that the current use of RPI will change, there is still a long way to go until any clarity around timings and process for this emerges. We don’t yet know exactly what it will look like and whether RPI may be completely phased out in the future or just aligned with CIPH or whether a new model index will be created.
However, it would be sensible for those involved in new lease negotiations involving rent increases to consider carefully which index they refer to, and to build in flexibility to use a different index, should RPI be phased out completely. It would also be worth revisiting existing contracts to allow for alternative indices to be used as necessary.