UK seeks views on RPI inflation reform as expert finds flaw

LONDON, Oct 8 (Reuters) - An expert on indexes reported thata method used to calculate Britain's RPI inflation measure - keyto many pay and pension rises - should be changed as it yieldsoverly high figures, and the country's statistics office beganconsultations on reform.

Three of the four proposals made by the Office for NationalStatistics (ONS) in the public consultation it launched onMonday would lead to a retail price index that is closer to theconsumer price index (CPI), which is typically lower. Theremaining suggestion is for no change.

Aligning the long-standing RPI more closely to the newer CPIcould save finance minister George Osborne 3 billion pounds($4.9 billion) a year in debt interest payments, but it risksalienating bondholders as RPI is used to calculate returns onindex-linked gilts.

Erwin Diewert, an expert in index number theory, said hismost important recommendation for improving RPI, arising fromresearch for the ONS, was to stop using an approach to averagingprices known as the Carli index. He said it had an "upwardbias".

Meanwhile, the ONS said in the consultation document:"Because of the known limitations of the Carli index, it isdifficult to defend based on international practice, and oncertain approaches to assessing the performance of indexnumbers.

"Given this, the National Statistician has decided that theneed to consult on a possible change was very clear, and theadvice from CPAC was the same," the ONS said, referring to itsConsumer Price Advisory Committee, which has been consideringchanges to RPI throughout this year.

RPI, which is also used to calculate some private sectorannual pay settlements and rises for many private pensions,among other contracts, has typically run 0.5-1.0 percent higherthan CPI.

Much of this disparity reflects different calculationmethods rather than any variation in the goods and servicesbeing sampled.

"The ONS appears strongly minded to recommend a change (toRPI)," Barclays economist Simon Hayes said.

The consultation will close on Nov. 30. The ONS plans toproduce its recommendations in January.

The final decision is likely to be in Osborne's hands as heis legally required to give his blessing if the changes beingproposed are judged by the Bank of England to be harmful tobondholders.($1 = 0.6176 British pounds)

(Reporting by Olesya Dmitracova; Editing by Anthony Barker)

((olesya.dmitracova@thomsonreuters.com)(+44 20 75428051)(Reuters Messaging:olesya.dmitracova.thomsonreuters.com@reuters.net))