Social security assistance - effects of inflation: report

3. Available inflation measures

3.1 The reporting duty requires the Scottish Government to calculate what the level of each form of assistance would be if it was adjusted to reflect inflation. In the context of the Act, 'inflation' means the change in the general level of prices for goods and services. It is for Scottish Ministers to work out what are 'relevant prices'^[11]. This means that Scottish Ministers can choose between the available inflation indices that measure change in the price level of goods and services over time.

3.2 The Scottish Government undertook a detailed review of relevant inflation measures, contained within the Policy Paper and Analytical Report, to inform the decision on uprating of devolved social security assistance. The Analytical Report explored in depth the methodological features of inflation measures and drew on a range of evidence including recommendations from the UK Statistics Authority and the Office for National Statistics, an independent review led by the director of the Institute of Fiscal Studies and the House of Lords Economic Affairs Committee's report 'Measuring Inflation'.

3.3 The report identified the Consumer Price Index (CPI), the Consumer Price Index including owner occupiers' housing costs (CPIH), and the Retail Price Index (RPI) as inflation measures that could potentially be used for uprating. Each index is a composite measure of price change in a representative basket of around 700 goods and services consumed by typical households.

3.4 The indices differ in several respects in terms of:

• which goods and services should be included in a representative basket;
• how price data collected from shops and outlets across the country should be aggregated to capture the average change in prices of different items; and
• how price changes of different items should be adjusted to reflect the different amounts households spend on each of the items in the representative basket.

3.5 These methodological differences account for the different overall price change in the economy that each measure reports.

• CPI was the headline measure of inflation, until the Office for National Statistics (ONS) switched to CPIH in March 2017. It has established a reliable track record as a National Statistic and it remains the measure that is used by the Bank of England to set the annual target for inflation. The CPI complies with the EU standard Harmonised Index of Consumer Prices and is therefore internationally comparable. It excludes some goods and services included in the CPIH and RPI, such as council tax, or owner occupiers' housing costs. In September 2019 the 12-month CPI was at 1.7%.
• CPIH regained its National Statistic status in July 2017 after becoming ONS' headline measure of inflation in March 2017. It is broadly similar to CPI but includes, along with Council Tax, a measure of owner occupiers' housing costs. In September 2019 the 12-month CPIH was at 1.7%.
• RPI includes some components not included in CPI such as mortgage interest payments of owner occupiers' housing costs, and council tax. The RPI is widely recognised by statisticians and economists as a flawed measure of inflation. While the ONS continue to publish RPI rates, the measure no longer meets the required standards for designation as a National Statistic. In September 2019 the 12-month RPI was at 2.4%.

3.6 Finally, the report also discussed emerging inflation measures such as household-specific and regional inflation indices, although neither are yet developed enough to be used as an uprating method. These measures may better reflect how inflation is experienced by different groups of people or in different regions. Our commitment to continue exploring and monitoring the development of emerging inflation measures aligns with our Social Security principle of continuous improvement and advancement of equality and non-discrimination.

3.7 However, careful consideration should be given to the feasibility and practicability of adopting more targeted measures. Adopting different measures for different groups could reinforce divisions between population groups and create undesirable complexities in the system.