Despite the rejection of any immediate change the Chancellor has left the door open to eventually ending the RPI measure and replacing it with the more modern CPI - or merging the two.
In a letter to Sir David Norgrove, chair of the UK Statistics Authority, Mr Javid says he has considered two proposals from the authority, one to cease publishing the RPI and secondly that RPI should be aligned with the Consumer Prices Index including housing costs (CPIH).
The Chancellor says that while there are “flaws” in RPI, ending its publication would require primary legislation and could be “highly disruptive” to the economy and public finances at present.
The most commonly quoted measure of inflation used by the government and industry is now CPI with CPIH used as a secondary measure. RPI has tended to be slightly higher in recent times than CPI and is no long widely, quoted although it is relied on by financial services firms as a way to assess annual inflation increases.
With Brexit on the horizon the Chancellor also says it would be a bad time to change an important measure like RPI. However, Mr Javid has intimated that things could change.
Until 2030 legislation requires Mr Javid to give his permission before any change to inflation measures but this requirement expires in that year, he noted.
Mr Javid also said that he may give permission to allow RPI to be aligned with CPI from February 2025 if safeguards were in place and consultation was carried out.
He wrote: “While we know that RPI is embedded across the economy, we do not know the full extent of the effects on users, how some will respond or how they might adjust contractual arrangements in advance of UKSA aligning RPI with CPIH.
“Given the potential for significant and diverse effects of the change you have proposed, it must be appropriate to start from the assumption that some or all users in the private and public sectors, households, firms and financial markets will need substantial time to prepare .
“Therefore, I am unable to consent to the introduction of the change you have proposed any earlier than February 2025, based on the information I have available.
“To ensure better information about the potential effects, the Government will consult publicly on whether this change should be made at a date other than 2030, and if so,
when between 2025 and 2030. As part of this consultation, UKSA will consult on technical matters concerning how to implement the proposed alignment of RPI with CPIH.
“The Government has made some changes in its use of inflation indices over the past decade in areas of public policy. I can confirm, as set out at Budget 2018, that the Government will not introduce new uses of RPI. The Government will continue to consider its use of RPI further at future fiscal events, drawing on the evidence gleaned in the consultation, and considering the issues in the round.”
Tom Selby, senior analyst at AJ Bell, said: “If RPI is eventually scrapped, the Government will have to figure out what to do about the existing stock of products and benefits where the inflation measure is used.
“Some private sector defined benefit pension schemes have RPI-linked increases baked into their scheme rules, for example, while millions of people have bought annuities which rise in line with RPI. Investors who have purchased index-linked Government gilts from the Bank of England also see the value of their coupon or yield increase in line with RPI.
“It is far from clear what would happen to these savers and investors in the event RPI is ditched altogether. Any move to rip up existing contracts would inevitably end up in a messy legal challenge.”
“As a result it may be that, even if RPI is ditched officially, the ONS will need to continue producing a notional figure in order to ensure those with RPI-linked products are not adversely affected.”