From the TUC

Which inflation measure does the Government prefer?

12 Apr 2011, by in Economics

As today’s Telegraph reports, TUC analysis demonstrates that despite CPI now being the Government’s preferred measure of inflation RPI remains its measure of choice for calculating the interest on student loans. This hypocrisy allows the Goverment to ask households to accept lower tax credit payments, faster moves into higher tax rates, reduced pensions and lower benefits while continuing to uprate payments that are due to the state by the higher RPI inflation measure. Over the long-run the Government calculate the difference is 0.87 percentage points annually: the costs for working, workless and retired households will soon start mounting up.

The Government’s justification for maintaining two inflation rates for payments and reciepts is incoherent – and is illustrated by BIS’s response to our analysis.

The Treasury have stated that CPI is the most appropriate measure to uprate benefits, tax credits, tax thresholds and pensions because: CPI is used to set inflation targets for the Bank of England; it excludes housing costs; and is a better representation of consmption patterns.

But in a reaction to our analysis from BIS, the following justification for uprating student debt interest by RPI was provided:

We use RPI rather than the CPI as it takes account of, amongst other things, changes in mortgage interest and council tax. These are typical expenses for graduates which are not included in calculation of the CPI.The RPI is a widely recognised measure of inflation, and is commonly used in uprating of maintenance payments and housing rents.

So, because graduates have housing costs and pay council tax they should pay higher interest on their student loan repayments. The logic in this statement isn’t completely clear – loan repayments will cost graduates more, so justifying higher repayments by noting that graduates also pay for housing and council tax seems a little odd. Surely a fairer comparison would be the rate by which graduates’ incomes will rise? And with tax credit and tax thresholds tied to CPI, and earnings currently rising far below both the CPI and RPI measures of inflation, it seems likely that RPI is not going to be a good indicator of graduate earning growth for some time to come.

The BIS statement also raises a far larger question: why, if RPI is a superior measure as a result of the inclusion of housing costs, it isn’t being used as a means to uprate payments made to those who pay for housing: why are tax credits, benefits and pensions all now CPI linked? Why, in particular, is Housing Benefit now to be uprated by CPI? Why are more people moving into higher tax bands more quickly (as a result of CPI linked tax thresholds) when the same people also pay for accomodation costs which are only considered by the RPI measure? The TUC has set these arguments out many times before – today’s BIS statement suggests that at least parts of the Government agree with us.

The hypocrisy of the Govermment’s position on uprating is now completely clear – all payments it makes will be reduced and payments it recieves will continue to rise at a higher rate.  As today’s comment makes clearer than ever, there is no real justification for this – the CPI link is simply a stealth cut for households across the UK.

3 Responses to Which inflation measure does the Government prefer?

  1. Hindle-a
    Apr 12th 2011, 12:49 pm

    The uprating of benefits by CPI and RPI is a “slow burner” which over time will have a highly significant to the “vulnerable” people this disingenuous Government has the gall to say it is protecting which many people do not realise they have done or is a mere technicality -shameful.

  2. Nigel Stanley

    Nigel Stanley
    Apr 12th 2011, 1:25 pm

    The Department of Transport also use RPI for setting the ceiling on rail fare increases.

  3. Bryn Davies
    Apr 15th 2011, 3:33 pm

    There are other ideas about what difference we can expect between the CPI and the RPI. The Office for Budget Responsibility suggests in its report “Economic and fiscal outlook – March 2011” that it expects what it describes as “the wedge between CPI and RPI inflation” to be around 1.2 percentage points a year in the long run. The Treasury on the other hand, its report on the consultation on the discount rate to use to value public service pension benefits, says that it expects the difference to be 0.75 percentage points. Other figures have been produced by various firms of consulting actuaries.