Written question asked by Gerald Howarth (Conservative) on Friday, 5 October 2007, in the House of Commons. It was due for an answer on Monday, 8 October 2007. It was answered by Bob Ainsworth (Labour) on Thursday, 18 October 2007 on behalf of the Ministry of Defence.

Defence: Inflation

Question: To ask the Secretary of State for Defence pursuant to the National Statistics Quality Review of Ministry of Defence Finance and Economic Statistics Implementation Plan, what progress his Department has made in creating a defence-specific inflation index; and if he will place a copy in the Library.

Answer: Work on developing a Defence related price index commenced in 2004-05 and has continued since. Unfortunately, despite commitment by both the Office for National Statistics and Defence Analytical Services Agency (DASA), work has as yet failed to produce a defence specific inflation index.Matching the companies, to whom MOD has made payments, with Office for National Statistics data has been difficult due to changes in names, ownership, recording of information and ONS data on prices being from a sample survey. Less than 20 per cent. of companies paid more than £1 million by MOD in 2002-03 could be matched to price data, which accounted for less than 30 per cent. of MOD spend. Confining analysis to the subset of Defence problems further decreases this already poor coverage causing any estimates of defence inflation to be unreliable and biased.Using published indices for MOD purchases of goods and services, and indeed the underlying data for these indices also presents a variety of problems. Price changes collected by ONS represent off the shelf products whereas the large value goods that MOD buys tend to be bespoke systems. Quality adjustment of price indices is appropriate for determining change in value, but not for the replacement costs that MOD faces. It is difficult to incorporate overseas expenditure. Indices used in placing contracts frequently do not reflect the expenditure patterns of the MOD.Work continues to overcome these challenges.

Secondary information