Mr. Paul Johnson:

I could speak about the construction of the CPI for a long time. The CPI itself is not being changed. Actually, there are many things happened, so let me go back a step. In terms of prices, we used to index everything to the retail prices index, RPI, which is a different measure of price inflation than the consumer price index. It is the longest standing index in the UK and has been produced on a somewhat consistent basis for 70 years or so. It is wrong in the sense that it overstates inflation for technical reasons that I will not go into. This became evident in 2010 when some changes were made to the collection of clothing prices and the gap between the RPI and the CPI grew significantly. Up to that point, most price indexation was in line with the RPI. Gradually over the past decade, most of it has moved into line with the CPI, which is the more correct measure of inflation. However, the British Government has left some areas where the RPI is still the basis for indexation. This includes some regulated prices, for example, interest rates on student loans and one or two other matters. It was noticeably slower to move from the RPI to the CPI where it was beneficial fiscally to keep to the RPI and quicker to move to the CPI where doing so saved money. We have got most of the way from the RPI to the CPI, though. As such, how inflation is measured matters. We need to get it right, which we were not for a long time. Indeed, we got it significantly wrong, particularly post 2010.

The Chairman might also be referring to moves to look at different measures of inflation for different kinds of household. Households at the lower end of the income distribution or spending distribution spend a higher fraction of their budgets on things like energy and food. Households at the higher end of the distribution spend more on holidays, services, electronic gizmos etc. Those do not necessarily go up at the same rate over time, although from what we can tell in the UK, there has not been any significant divergence for some time in the rate of price changes faced by households in different parts of the distribution. That remains true even now, although we expect that to change over the next two or three months as energy prices start to bite, and they will definitely bite more for those towards the bottom of the income distribution.

There is then an interesting question as to whether, year by year, we want to have measures of prices that are sensitive to the different rates of inflation that may be faced by different groups in the population. If one were to increase pensions in line with prices, for example, one might want a pension price index. We have produced those in the past. For those on welfare benefits, one might want a price index that looks at the basket of goods that they purchase. These things are doable. When there are significant differences - such times exist - there may be some benefit in doing this, but one would need to be careful about a proliferation of price indices and price index shopping. One needs to move to decisions in that direction carefully and with considerable consensus. Otherwise, we would be in danger of creating a great deal of instability. I can imagine a world where it was decided for all the best possible reasons to increase welfare benefits in line with a price index that was determined by the spending patterns of the poorest people. There could easily be a year where that index was much lower than or even negative compared with the overall price index. In those circumstances, it might prove difficult to implement.