'It is time to stop arbitraging between RPI and CPI and standardise benchmarks'

Whether it is a comparison of wages, prices, benefits, investments (especially in environmental, social and governance), it can appear – rightly or wrongly – that a number of firms are ‘dicing and slicing’ index measurements to put their performance in the best light.

Indeed, there is a lack of transparency when it comes to the end user, be it an adviser or a client, on just why a particular index from RPI to MSCI is chosen as that all-important benchmark. And regulators have limited powers when it comes to excessive profits, from utilities to bankers, in inflationary times.

Some discretionary investment managers tell me they do not use FTSE indices on their client reports as usage fees cost too much money, but opt for MSCI indices instead.

Are both sets of indices strictly comparable? And how can you measure ESG-linked funds, as the concept of a 'green index' is so subjective?

Drilling down FTSE and MSCI indices to highlight inconsistencies is too big a task for an opinion columnist like me, but I can shine a spotlight on simpler services to show how providers appear to ‘game’ the system. Let’s stop this practice now.

Action replay

The study of inflation fascinates me. I am a rarity; one of the few people in financial services to have been at the eye of the UK inflation storm, twice – today as financial journalist and in the 1980s as a junior employee at nationwide adviser, Julian Gibbs Associates.

Inflation is a convenient scapegoat.

Inflation then peaked at 18 per cent. I sold guaranteed income bonds, yielding 12 per cent a year, from some of UK’s biggest insurance companies. That was the going rate. Astonishing today. My phone number, advertised in six national newspapers, never stopped ringing.

Panic-buying ensued but sadly I was not on commission. Despite decent pay for a junior, in real terms I was worse off at the end of the year. A harsh lesson in economic reality I have never forgotten.

Watch out for stinging April price hikes

Advisers and personal customers alike will shortly face huge inflation-linked broadband price increases from April 2024. The whole concept of inflation-linked contracts is wrong. These price hikes bear little relationship at all with the actual costs of providing the service.

Energy prices are going down internationally, yet utilities still ramp up standing charges for pipes etc on top of massive energy hikes – just one more example seeking profits at all costs.

An inflation-linked price rise, even on a fixed term contract, is just about tolerable. What is verging on the usurious is the adding of a further 3 percentage points above inflation. And with no rights of free cancellation.

Automatic inflation increases above inflation should be illegal, if there are penal exit charges.

The actual broadband charge may bear no relation to inflation if the provider has made efficiency or productivity savings.

Any costs from utility providers should be commercially justified – not index-based as an autopilot cash cow. It is time to stop arbitraging between indices and standardise these benchmarks.

Most broadband users at least base their price rises on CPI, but Virgin uses the usually higher RPI as do the providers of student loans – students are usually charged RPI plus up to 3 per cent, with a nod to prevailing market rates.

Energy prices are going down internationally, yet utilities still ramp up standing charges.

In January 2024 the interest rate is 7.6 per cent on some student loans. And the loan is not written off for 40 years. Almost usury in my opinion. A tax on knowledge.

Sir Ian Diamond, chief executive of the UK Statistics Authority and national statistician, told the FT a while back: “We have been clear for a number of years that the RPI is a very poor measure of inflation, at times greatly overestimating and at other times underestimating changes in consumer prices.”

So why is any contract allowed to be linked to RPI if it is so inaccurate? You can’t have it both ways.

From benefits to bonds

The government is also guilty when it comes to index selection, from benefits to bonds. People have invested in index-linked gilts or their pensions on the understanding that they would be up-rated by RPI. They entered those arrangements with knowledge of the difference between RPI and CPI.

Yet from 2030 up to 9mn defined benefits pensioners will be short-changed in their pensions, as the Office for National Statistics abandons the discredited RPI in favour of CPIH. 

As the switch takes place, gilt holders – mostly institutional but anyone holding UK index-linked gilts – are likely to lose out without compensation, getting around 1 per cent compound less yield.

Pensioners will have their pension cut in real terms at a stroke. Over an average lifetime, the Pension Policy Institute has calculated that a male could lose 9 per cent on their overall DB pension, and women will have a larger lifetime reduction, as they live longer. That is equivalent to tens of thousands of pounds.

Drilling down on detail

Looking under the bonnet at the construction of the various indices, the RPI includes a measure of housing costs, whereas CPI excludes a number of measures, mainly relating to housing costs (for example council tax), and in particular to owner occupiers’ housing costs (including mortgage interest payments, house depreciation and buildings insurance).

Although CPIH covers owner occupiers’ housing costs, it does so on the basis of rent rather than mortgage interest – sadly, not reflecting everyday experience.

Despite the confusing collection of national indices, an ONS spokesperson told me: “We collect more than 180,000 prices across more than 700 different items to use in the calculation of our headline measures. We are confident that these aggregate measures are an accurate reflection of overall inflation in the economy.”

In addition, the ONS is developing radical new plans to increase the number of price points dramatically each month from 180,000 to hundreds of millions, using prices sent to it directly from supermarket checkouts.

But pensioners or students have totally different experiences of inflation. The ONS has the answers to this too. Last year it released an interactive shopping basket to enable users to see and compare how the price of different items have changed in the past year. It also has a personal inflation calculator.

Perhaps celebrated author Mark Twain was not so far wrong when he said: “There are lies, damned lies and statistics”. Time for a rethink?

Stephanie Hawthorne is a freelance journalist