From the TUC

Difference between CPI and RPI increases to 1.4%

30 Nov 2011, by in Pensions & Investment

The Office for Budget Responsibility has increased its forecast for the long run difference between the CPI and RPI inflation measures to 1.4 per cent. Previously they thought it would be 1.1 per cent.

One of the government’s attacks on public sector pensions is to change the way that pensions in payment are linked to prices. In the past they have gone up in line with the retail price inflation (RPI) inflation measure. In future they are linking pensions to the consumer price inflation (CPI) measure.

CPI differs from RPI in two ways. First, it excludes a number of items, mostly those linked to housing such as rents, mortgages and council tax. Second, there’s a vital if very technical difference in the way that it is calculated. But you don’t need to understand the nerdy difference between the CPI’s geometric mean and the RPI’s arithmetic mean to understand that it will make the CPI lower.

Historically the difference between the two has been between about 0.7 per cent and 0.9 per cent, but the OBR say

Based on the decomposition of the differences between these measures, further analysis in this paper suggests that a plausible range for the long-run difference between RPI and CPI inflation is around 1.3 to 1.5 percentage points (Table 3.1). For the basis of our November 2011 EFO, we assume that the difference between RPI and CPI inflation is around 1.4 percentage points in the long run.

Over time this means pensions in payment will go up a little less each year.

After 15 years this would lead to a CPI indexed pension being 17.4 per cent lower than an RPI indexed pension.

The table show s the difference over 20 years.

Years of retirement Difference between and RPI and CPI pension

1

0.0%

2

1.4%

3

2.7%

4

4.0%

5

5.3%

6

6.6%

7

7.9%

8

9.1%

9

10.3%

10

11.5%

11

12.7%

12

13.9%

13

15.1%

14

16.2%

15

17.4%

16

18.5%

17

19.6%

18

20.7%

19

21.8%

20

22.8%

One Response to Difference between CPI and RPI increases to 1.4%

  1. CPI shift makes public sector pensions much poorer value | ToUChstone blog: A public policy blog from the TUC
    Dec 1st 2011, 12:57 pm

    […] difference in the way they are calculated. The independent Office for Budget Responsibility now says that this difference over the long-term future will be between  1.3% and 1.5% […]