It would incur disproportionate cost to outline every single measure used and the reasons why. My Department uses the retail prices index, consumer prices index, and other relevant indices (including GDP deflators, average earnings index, producer prices index, and private sector measures such as house price indices). Uses will include the re-rating and revaluing of charges, rates, reliefs, rents; the indexing of contracts, funding arrangements and pay agreements; analysing, forecasting and estimating real-terms changes and trends.

The Department's choice of measure is dependent on a number of factors including:

requirements explicitly specified in legislation,

central Government guidance (for example. HM Treasury's Green Book),

historical availability (the consumer prices index only came into being in 1996, whereas the retail prices index dates from 1947),

differences in the coverage of each measure (for example, the consumer prices index excludes housing costs, such as council tax, mortgage interest payments and major repairs), and

the general fit and appropriateness for the public policy topic.

Further details of the differences between the main measures of inflation are provided in various guidance documents published by the Office for National Statistics:

www.statistics.gov.uk/hub/economy/prices-output-and-productivity/price-indices-and-inflation

The Department uses both RPI and CPI to monitor and forecast contract prices. Specific industry indicators are also used for this purpose in areas such as energy, oil, metals, and paper.

The GDP deflator is used by the Department to inform medium and long-term financial planning, including the running costs of programmes and estimated savings from reforms and policies. This is in line with Treasury guidance.

For planning our future overall budget the Ministry of Defence (MOD) uses the gross domestic product (GDP) deflator mandated by HM Treasury. We have also calculated a series of inflation indices for specific commodities, such as fuel or service personnel pay, based on wider industry indices or historic trends.

A variety of price indices are used in defence contracts depending on a range of factors. In 2010-11, the latest year for which the analysis is available, the MOD spent £9.3 billion on fixed price contracts containing a variation of price clause. Around 30% of expenditure on these

fixed price contracts was linked to the retail price index (RPI) series, principally RPI excluding mortgage interest payments, but consumer price index (CPI) and other rates of inflation were also used.

The MOD also produces an annual estimate of defence inflation, incorporating estimates for contract inflation, labour costs and cash office expenditure. RPI, CPI and a range of other inflation rates are used in calculating these estimates. Forecasts of inflation rates have also been developed in order to support policy and financial planning within the MOD.

Further information can be found in the Defence Inflation Estimates Statistical Notice 2011-12 document available online at the following address:

http://www.dasa.mod.uk/applications/newWeb/www/index.php?page=48&pubType=l&thiscontent=740&PublishTime= 09:30:00&date=2013-01-09&disText=2011%20/%2012&from=listing&topDate=2013-01-09

The Department for Work and Pensions (DWP) uses the consumer prices index (CPI) as the measure of prices in the up-rating of various social security benefits and pensions. This information is published alongside the Budget each year in Annex A of the Policy Costings document. For Budget 13, this is available online via the following link:

http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/188367/budget2013_policy_costings.pdf.pdf

Not all social, security benefits and pensions are up-rated by reference to prices inflation. For example, this Government has legislated to restore the up-rating of basic state pension by at least the growth in average earnings. We have also gone further, in our 'triple lock' commitment to up-rate the basic state pension by the highest of prices (measured by CPI), earnings or 2.5%.

The CPI is also used for the statutory minimum increases in certain occupational pensions and for increases in Pension Protection Fund compensation and assistance from the Financial Assistance Scheme.

The CPI is used in the context of the employer duties under the workplace pension reforms. It is used as part of the minimum quality requirement for qualifying schemes providing average salary benefits. It is also one of the specified factors that the Secretary of State for Work and Pensions may take into account when considering whether any of the earnings trigger or the qualifying earnings band for automatic enrolment should be increased or decreased.

The CPI is used in most benefits and pensions expenditure forecasting by the DWP, produced on behalf of the Office for Budget Responsibility. The exceptions are (i) where benefits are up-rated using average earnings; and (ii) also the forecasting of some aspects of housing benefit expenditure using the retail prices index (RPI),

to reflect how social rents are up-rated. The GDP deflator is used to convert expenditure to constant price terms, in line with general Government practice.

DWP statistical publications “Households Below Average Income” (HBAI), “Family Resources Survey” (FRS) and “Pensioners' Incomes Series” (PI), use variants of the RPI. DWP officials plan to engage with users of the HBAI, FRS and PI data and publications during summer 2013, to explore whether the adoption of an alternative index would be appropriate, taking into account user needs, data availability and methodological issues.

The model for DWP Commercial contracts has a standard ‘Term and Condition’ which requires that any increase in the contract price shall not exceed the percentage change in the ONS' CPI. A very small number of commercial contracts—that were let prior to this specification of CPI—continue with alternative indexation arrangements (using RPI) and these will be removed when these are re-let in the future.

The Scotland Office uses measures of inflation for a range of analytical purposes, including in respect of the Scottish economy.

The Department of Energy and Climate Change uses relevant inflation indices where appropriate. Significant applications are:

The Retail Price Index

The DECC statistics team republishes the energy components of the RPI within tables 2.1.1, 2.1.2 and 2.1.3 of our Quarterly Energy Prices publication. The DECC statistics and fuel poverty teams use the data for price indicators for non-metered energy fuels. We are likely to switch from using the RPI to the CPI later this year following recent changes to the designation of the RPI series by the UK Statistics Authority.

Where contractually obliged, the Department refers to relevant RPI indices when assessing specific historic energy liabilities. These are payments for historic fuel liabilities resulting from the British Energy restructuring in 2005, and the cost of providing either solid fuel or a cash alternative to ex-miners and their dependents under the National Concessionary Fuel scheme.

The Levy Control Framework does not use any particular inflator, but constituent schemes (Warm Homes Discount, Renewable Obligation, Feed in Tariffs, FiTs Contract for Difference) are uplifted where necessary using either the RPI or CPI, as dictated by the relevant policy.

For the Renewable Heat Incentive, the RPI is used to express prices in nominal terms. This means that the tariff received, and the total spend under the RHI, is expressed in the price level of the year in question.

For the CRC Energy Efficiency Scheme the methodology used to project the revenue to Government from the sale of CRC allowances is based on the prices announced by Government adjusted in line with Retail Price Index thereafter.

The Consumer Price Index

The CPI is used for the gas price projections in the latest published DECC fossil fuel price projections (2012).

Alternative measures of inflation

The DECC statistics team use the GDP deflator published by the Office for National Statistics to show data in real or constant price terms.

Coal price projections use the International Monetary Fund's GDP deflator.

Core DEFRA uses the consumer price index (CPI) and retail price index (RPI) for indexing rates in contracts and they are widely used for removing the effects of price changes in statistical time series and impact assessments.

The precise index series used will be reviewed, for example when new contracts are negotiated.

The key purposes for which the Department uses different measures of inflation include:

(1) The Teacher's Pension Scheme (TPS):

Pensions and benefits accrued and paid under the TPS are currently uplifted in each year by the consumer prices index (CPI). Furthermore, there are provisions in the TPS relating to historical purchases of additional pension by scheme members, which are indexed by the retail prices index (RPI) in very limited circumstances.

(2) Published impact assessments:

In accordance with the guidance given in HM Treasury's Green Book, GDP deflators (a whole economy measure of inflation) are used in published impact assessments to express the costs and benefits of policy proposals in real terms.

(3) School building and maintenance contracts:

The Department uses the BIS public sector (non-housing) index (which measures the movement of tender prices for building contracts in the public sector) when setting the maximum price against which contractors may bid for 'design and build' contracts under the Priority Schools Building Programme (PSBP). RPIX (RPI minus mortgage interest payments) is used to calculate part of the unitary charge that is paid to providers under long-term private finance agreements, to ensure that payments to operate premises for the life of the contract—typically 25 years—are in line with the costs of providing services like building maintenance.

(4) Long-term contracts with service providers:

The TPS is administered under contract by Capita, whose contract fee is uplifted annually by the CPI. Payments in relation to the contract to manage the marking of key stage 2 tests are also linked to the CPI.

The Wales Office does not generate statistical analysis that would require us to use such indices.

There are many contracts in my Department and its agencies which are linked to the Retail Price Index (RPI). These include PFI service payments, the Severn River Crossing loan and grants to Passenger Transport Executives and Network Rail. Many of these payments are contractually linked to a specified inflation measure so we cannot change to an inflation measure that produces different payment amounts without reopening the contract.

Other major uses of the RPI by my Department are in annually inflating Network Rail's Regulated Asset Base (RAB), calculating the annual permitted increase in regulated rail fares using an RPI related formula and in re-letting franchises, where an assumption on RPI is a fundamental element of the bid.

Many of the Department’s models which forecast transport demand and network congestion use both the RPI and the Gross Domestic Product (GDP) deflator, as published by HM Treasury. Various inflation indices are used in appraisal of policies, in particular in Impact Assessments. This is often the GDP deflator, to calculate

figures on a comparable price base but the inflation index used should be explained in all published Impact Assessments.

Other inflation indices used include Average Weekly Earnings (AWE) which is used as an index for labour related costs in some franchise agreements, resource cost index of road construction (ROCOS) which is used in valuation of the road network and regional land and building indices (derived from RICS market appraisal) which are used by the Highways Agency to value freehold land and buildings yearly.

This information is published alongside the Budget each year in Annex A of the ‘Policy Costings’ document. For Budget 13, this is available online via the following link:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/188367/budget2013_policy_costings.pdf.pdf

This information is published alongside the Budget each year in Annex A of the Policy Costings document.

For Budget 13, this is available online via the following link:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/188367/budget2013_policy_costings.pdf.pdf

The Department for Culture, Media and Sport uses the retail prices index measure of inflation in some of its procurement contracts that have an annual uplift, which is RPI based. The Department may also, on occasion, use other measures of inflation as required for accounting adjustments or budget planning.

Information around the use of inflation measures is published alongside the Budget each year in Annex A of the Policy Costings document. For Budget 13, this is available online via the following link:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/188367/budget2013_policy_costings.pdf.pdf

From a financial accounts perspective, uses of inflation measures in BIS's accounts are mentioned in the published annual report and accounts. The BIS Annual Report and Accounts for 2011-12 is published on thedata.gov.uk website:

http://data.gov.uk/dataset/bis-annual-report-and-accounts

The accounting areas that mention use of inflation measures are student loans (on pages 151, 166 to 170 and 206) and launch investments (on pages 172 and 173).

The Department uses a number of different measures of inflation for a number of different purposes, including the following:

(a) The retail price index (RPI) measure of inflation is used to inform:

level of future payments made by the NHS Litigation Authority;

Health service cost index (uses both RPI and gross domestic product (GDP) deflators);

NHS Pay Review Bodies (consider both RPI and the consumer price index (CPI)); and

payments to externally financed premises such as private finance initiative (PFI) contracts.

(b) The consumer price index (CPI) measure of inflation is used to:

Calculate support payments paid to individuals infected with Hepatitis .C or HIV through NHS blood transfusions.

(c) GDP deflators are used to inform the setting of:

sight test fees and optical vouchers (also uses RPI);

tariff uplift;

dental charges;

prescription charges; and

overseas health payments and income (both historical trends of inflation and GDP deflators are used).

It is considered to be of disproportionate cost to compile a comprehensive list.

DFID uses monthly consumer price indices, published by the Office for National Statistics, to revalue its vehicles, furniture and equipment and IT equipment assets. These assets are reported in the Department's annual report and accounts. This revaluation is in accordance with the requirements on accounting for tangible assets, set out within the HM Treasury Financial Reporting Manual.

The consumer prices index (CPI) is also used for price indexation of public service pensions.

My Department does not use either the retail price index or the consumer price index for any purpose.

In order to meet Government accounting requirements, my Department uses a combination of the Office for National Statistics Tax and Price Index and specific indices for specialised buildings and land supplied by Land and Property Services, Department of Finance and Personnel NI.

The Foreign and Commonwealth Office (FCO) uses measures of inflation internally for analytical and management information purposes, but no area of expenditure is currently directly linked to inflation rates. The UK retail and consumer price indices are not significant drivers for FCO policy or spending.

Some alternative measures of inflation are used by the FCO: price surveys conducted overseas are factored into the calculation of the cost of living allowance (COLA) paid to compensate UK-based staff overseas; our Posts abroad will consider local inflation when setting pay levels for locally-engaged staff; and data from the International Monetary Fund World Economic Outlook are used to monitor the difference between UK and overseas price levels to inform the FCO's overseas spending.

The Home Department uses the following inflation indexes for the following purposes:

(a) The retail price index (RPI) is used to calculate inflation driven price increases in contracts including those for PFI, rent and maintenance.

(b) The consumer price index (CPI) is used to calculate inflation driven price increases in contracts, including those for rent and maintenance. It is also used for Asylum subsistence payments.

(c) Other alternative measures of inflation issued by the Office of National Statistics can be used if RPI or CPI are not considered appropriate.

The information requested falls within the responsibility of the UK Statistics Authority. I have asked the authority to reply.

Letter from Glen Watson, dated May 2013:

As Director General for the Office for National Statistics, I have been asked to reply to your Parliamentary Question concerning the known official uses of the retail prices index (RPI), consumer prices index (CPI) and any alternative measure of inflation. (155048)

The uses have been described in an article ‘How ONS consumer price statistics are used’:

http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/july-2011/how-ons-consumer-price-statistics-are-used.pdf

The article adds more detail to the following summary.

Both CPI and RPI are used as macroeconomic indicators of inflation particularly by Her Majesty's Treasury to inform decisions on economic policy and to monitor the effectiveness of policy. A range of government departments also use both measures to monitor how prices for specific goods and services compare with general levels of inflation and to remove the effect of price changes when forming policy.

The RPI is used to uprate the redemption values of index-linked gilt-edged securities and national savings certificates.

The CPI is used:

as the basis of the government's inflation target.

to deflate ONS retail sales estimates and relevant components of the national accounts, such as household final consumption expenditure, to constant prices so that the effects of price change are removed from the series.

in the uprating of state pensions (alongside the average weekly earnings index), public service pensions and most state benefits.

Two new official measures of inflation - CPIH and RPIJ - were introduced in March. CPIH is a new measure of consumer price inflation that includes owner occupiers' housing costs. These are the costs associated with owning, maintaining and living in one's own home. RPIJ is an improved variant of the Retail Prices Index which is calculated using formulae that meet international standards. ONS currently classifies these new series as experimental statistics and they are being assessed by the assessment team of the UK Statistics Authority to determine whether they should be awarded National Statistics status. Since they have only recently been introduced, there are unlikely to be many official uses as yet.

There is, additionally, a family of indices behind the headline measures that is used for a variety of official purposes. For example, CPIY is the CPI excluding price changes which are directly due to changes in indirect taxation. This is used, for example by HM Treasury, to assess inflation at times when the headline CPI is directly influenced by Government-driven changes to taxes and duty.

The CPI is also the UK's official measure of inflation provided for the purposes of the European Union. In that context it is referred to as the harmonised index of consumer prices (HICP). HICPs provide the official measure of consumer price inflation in the euro-zone for the purposes of monetary policy in the euro area and assessing inflation convergence as required under the Maastricht criteria.

These are the official uses known to ONS.