In its February Inflation Report the Bank of England has admitted that all inflation calculations between 1997 and 2009 were wrong!
The culprit is clothing, which has been consistently under-counted. This has made CPI 0.3% lower than it should have been. The report says the impact on RPI is larger but doesn't quantify it. The basic error seems to have been they were counting sales prices not everyday prices. [Page 39 of the report.]
Obviously this is very embarrassing for the Office of National Statistics which does the sums, and it may go some way towards explaining why the Bank of England's fight against inflation has been consistently failing. (A year ago the Bank was predicting that CPI today would be 1% - actually it's 4% - that's a substantial deviation.)
Dr Andrew Sentance, MPC hawk, in a speech to the Institute of Economic Affairs today claimed that the Bank is selling out the country by the pound. (It's a reference to a 1973 Genesis album.) By this he means that putting the bank rate up would raise the value of sterling and so cause our imported costs, eg oil, to fall. Hence inflation would fall. Contrast this with the attitude of Mervyn King who claims imported inflation is beyond our control and should be ignored. (Did he ignore the imported deflation we had between 2000 and 2007 when the country was flooded with cheap Chinese tat? No, he took the credit for the low inflation without comment!)
There is also another big problem with all the inflation numbers being wrong since the year dot; something which might prove expensive for the government. People holding index-linked gilts, people owning index-linked national savings certificates, people receiving index-linked pensions and people with index-linked benefits have all been short-changed. These items are all RPI-linked and it seems holders are due a back-dated payment of around 0.6% per year, going back twelve years.
Recipients of pensions and benefits will probably just have to lump it. The government can claim parliament sets the rate and that's an end to it. But holders of gilts, mainly large city funds, may already be peering at the small print of their contracts. There may be some compo to be had here.