The Office for National Statistics (ONS) has recently brought out a consultation document on proposals to change the Consumer Price Index (CPI) to include Owner Occupied Housing (OOH) costs. CPI, unlike Retail Price Index (RPI), does not include these at present.

CPI is the inflation index that has to be used in NAPS (as it is in the “Annual Review Orders”) and is also the index used in APS (though APS is not mandated to follow the Annual Review Orders).

This change to CPI will therefore affect BA Pensioners. For example, it would have resulted in a 0.8% lower rise in CPI from Jan 2007 to Jan 2011, though one could argue that the housing costs would therefore join CPI at a low base, so that 0.8% could be recovered in future years if the housing market gets back to its relative position of Jan 2007.

This new CPI, called CPIH, would not necessarily be adopted by the Government to replace the current CPI in the Annual Review Orders . However, given the document proposes CPIH is to be the “main focus on reporting inflation in UK”, it would be politically difficult for the Government not to adopt CPIH for the Annual Review Orders?

Feedback on the document is invited by ONS from individuals or groups. ABAP has decided to give its feedback. We are therefore inviting you to let us know what you think about the document, if you wish to contribute to the ABAP feedback. You can instead respond directly to ONS yourself, if you prefer, or individually and via ABAP.

There will probably be a similar document and consultation exercise in a year's time, on the “formula effect”, which is responsible for most of the gap between the generally smaller CPI and larger RPI rises over the last few years. So this year's feedback from ABAP will also be a useful dry run for the very important feedback we will need to give then.

Here is a summary of the main points of the document, concentrating on its relevance to BA pensioners:

Summary of the ONS consultation document
• 11 Jun to 31 Aug 2012 consultation period
• feedback is to ONS
• feedback methods: online or post or email (see the web link for addresses, feedback forms etc)
• Many OOH costs are currently missing from the current CPI
• OOH costs are about 10% of consumer expenditure; their missing “is seen as CPI’s biggest weakness” , so for consistency they should be part of the CPI calculation. (However, OOH costs are not the biggest driver of the difference between CPI and RPI, as OOH inflation is similar to general inflation)
• CPI as it is now will, from Feb 2013, add the cost of owner occupied housing (OOH) to become “CPIH”
• CPIH is to be the “main focus on reporting inflation in UK”
• CPI as it is now will remain for EU work (=HICP, agreed measure to compare countries’ inflation within EU)
• 4 different approaches were considered to get a measure of OOH into CPI: rental equivalence, net acquisitions, narrow user cost and a payments approach. (Rental equivalence is the method used in most European countries) .

Recommendations of the consultation document:
• The rental equivalence approach is to be used to reflect OOH costs in a new, additional measure of consumer price inflation (CPIH).
• The CPIH should be published alongside the existing measures of consumer price inflation (eg CPI and RPI).
• We need a new index, CPIH, as the currently defined CPI is still needed to tie in with EU’s HICP.
• It is proposed that CPIH is then further developed to meet UK user needs as much as possible
• No change to current CPI and RPI calculations
• CPIH introduced in Feb 2013

ONS: A Strategy for Consumer Price Statistics
• This document (Annex E to the consultation document) explains various indices and says (amongst other things)
• Unjustified differences between the indices will be eliminated where possible.
• ONS will continue to work towards identifying, understanding and eliminating unjustified causes of the formula effect gap between the different indices. Remaining differences will be explained so that users understand the reasons for them.
• Feedback is also sought for this document by ONS

Here is a link to the consultation document:

We will publish the draft ABAP reply on this website on 3Aug, leading to our final version on 10Aug, which we will then send to ONS in time for its 31Aug deadline.
I will coordinate the feedback and the ABAP reply. Can you get any views to me by 31Jul? You can contact me by email on

i.heath@ntlworld.com

or by post to

1, Falconwood
Egham
TW20 0LS

I will aim to reply to your emails, copying in the ABAP committee, but will not be able to reply to all comments sent by post. All your feedback will help form the ABAP reply to ONS though.

Ian Heath