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Statutory provisions concerning changes to the Retail Prices Index
The Statistics and Registration Service Act 2007 established the UK Statistics Authority (referred to as the “Statistics Board” in the Act), as an independent body, at arm’s length from government, reporting directly to Parliament. The Authority is responsible for promoting and safeguarding the quality of official statistics.

The Authority is required to ensure the compilation and maintenance of the RPI and that it is published it every month. The National Statistician is the Authority’s principal adviser on statistical matters. The Office for National Statistics (ONS), as the Authority’s executive office, is responsible for the production and publication of price index statistics. Changes may be made to the coverage and the basic calculation of the RPI, although in certain circumstances, under section 21 of the Act changes may only be made with the consent of the Chancellor of the Exchequer following consultation with the Bank of England.

Section 21 of the Statistics and Registration Service Act 2007:
“(2) Before making any change to the coverage or the basic calculation of the retail prices index, the Statistics Board must consult the Bank of England as to whether the change constitutes a fundamental change in the index which would be materially detrimental to the interests of the holders of relevant index-linked gilt-edged securities.

(3) If the Bank of England considers that the change constitutes a fundamental change in the index which would be materially detrimental to the interests of the holders of relevant index-linked gilt-edged securities, the Board may not make the change without the consent of the Chancellor of the Exchequer.”

The Explanatory Notes accompanying the Act:
“This is because, among other things, the RPI is used to calculate returns on index linked gilt-edged securities ILGs, which are government securities issued by HM Treasury under its borrowing powers in section 12 of the National Loans Act 1968. The prospectuses of ILGs first issued before July 2002 provided as follows:

“If any change should be made to the coverage or the basic calculation of the Retail Prices Index which, in the opinion of the Bank of England, constitutes a fundamental change in the Index which would be materially detrimental to the interests of the stock-holders, Her Majesty‟s Treasury will publish a notice in the London Gazette immediately following the announcement to the relevant Government Department of the change, informing stockholders and offering them the right to require Her Majesty‟s Treasury to redeem their Stock in advance of the revised index becoming effective …”

The prospectuses of eight gilts with maturities ranging from 2009 to 2030 currently contain this redemption clause and the aggregate outstanding amount of these gilts is substantial. There are now five gilts in issue containing the clause, with maturities ranging from 2013 to 2030.

The rationale of the redemption clause was to protect holders against arbitrary changes in the nature of the RPI. However, depending on the nature of the change to the RPI and on market circumstances at the time, the triggering of the section could have a significant impact on financial markets and potentially on the public finances.

Subsection (3) provides that if, under subsection (2) the Bank of England considers the proposed change to constitute a fundamental change that would be materially detrimental to holders of ILGs, then the Board may not make the change without the consent of the Chancellor of the Exchequer.”

Therefore, in the event that the National Statistician was to recommend a change to the RPI that, in the opinion of the Bank of England, constitutes a fundamental change in the index that would be materially detrimental to the interests of the holders of relevant index-linked gilt-edged securities, and the Chancellor were to consent to such a change, then HM Treasury would publish a notice informing stockholders and offering them the right to require HM Treasury to redeem their Stock.

HM Treasury has informed ONS that it will provide advance notice, via its website, of the date the consent or otherwise, if required, of the Chancellor of the Exchequer to any change would be published in the event that a change to the RPI is recommended. The Debt Management Office (DMO) will circulate this notice among market participants by way of a screen announcement.

Other uses of the RPI include setting wage increases, indexation of rail fares, for indexing some pensions and in contracts.

Formulae used in the RPI
There tends to be a lack of reliable expenditure data for products at the lowest level of price collection (for example, canned fruit), meaning it is not always possible or meaningful to derive weights in either quantity or value terms for individual products within tightly defined commodity groupings (for example, for tinned peaches or tinned pears). In these circumstances it is accepted practice to assign an equal weight to each price observed. In the RPI, price indices at the lowest level are predominately calculated using a simple arithmetic average.

The average of price relatives (also known as the Carli) is calculated as the arithmetic average of price changes.

The ratio of average prices (also known as the Dutot) is calculated by dividing the arithmetic average price in one period by the arithmetic average price in a reference period.

A description of these methods is available in section 9.3 of the Consumer Price Indices Technical Manual. Further information on these is set out in the consultation document published today.

Consumer Prices Index
The CPI uses a geometric approach (known as the Jevons) to average items where there is no information about precise expenditure. As with the RPI, further information on the geometric average is given the Consumer Price Indices Manual and is included in the consultation document published today.

There are no proposals to change the way the CPI is calculated because of the very limited use of the arithmetic average formula for items at the lowest level of price collection.

Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk