From the TUC

Switching from RPI to CPI is even more of a disadvantage than we thought

02 Mar 2012, by in Society & Welfare

Pensioners, carers, disabled and unemployed people are losing even more from changes to the way inflation is calculated than we thought. Unions have been complaining about this change continually since it was first announced just after the general election, but it turns out that we haven’t been making enough fuss: some of the poorest people in the country are going to be losing twice as much as we thought.

Soon after the election, the government announced that it was going to change the way inflation is calculated for the annual increases in pensions and other benefits. Instead of the Retail Price Index, they now use the Consumer Price Index. This sounds rather boring and technical, but, as I’ve noted before, over a number of years, the change will make a big difference to pension levels and the rates of other benefits.

For individuals, that eventually means much lower incomes (ask pensioners what they think about Mrs Thatcher’s decision to switch from raising benefits in line with earnings to raising them in line with inflation.)

For society, it means that the poorest people – those who have to live on benefits for a long time – fall further and further behind the rest of us.

Until now, I’ve been working on the assumption that the average difference between the annual rate of inflation calculated using CPI and using RPI is about 0.7percentage points. Take two people whose pension or other benefit was £10,000 a year in January 2012, uprated each January, one by CPI the other by RPI. The difference may only be 0.7% a year, but by 2036, while the first has risen to £16,084 the second has reached £18,954 – 17.8% more.

But it turns out that this is probably a huge under-estimation of the problem. The OBR has published a useful paper on The long-run differences between and RPI and CPI inflation, which suggests that “the long-run difference between these measures may be significantly higher in the future.”

The OBR initially expected the difference to be half a percentage point higher – 1.2% – but this working paper estimates that it will be 1.3 to 1.5 points – for the OBR’s November Economic and Fiscal Outlook they assumed a 1.4 point difference. This is massive. Look at the impact on the same example as before:

By 2036, the claimant uprated by CPI will get a bit over £16,000. The claimant uprated by RPI will receive more than £22,000 – 39% more.

4 Responses to Switching from RPI to CPI is even more of a disadvantage than we thought

  1. Bill Kruse
    Mar 2nd 2012, 2:44 pm

    It isn’t in any way economically sensible to switch from RPI to CPI when it comes to costing pensions etc because it adversely affects demand so there go any realistic savings. We simply become poorer as a nation, being less able to buy and sell, except of course for those of us already up there in the one percent who such measures don’t touch. It’s a decision based upon sheer malevolence, then, designed to further financially disable the majority of the population government is supposed to protect.

  2. Hindle-a
    Mar 3rd 2012, 4:21 pm

    “It’s a decision based upon sheer malevolence”-exactly,there is no other possible explanation.

  3. Alan Short
    Mar 6th 2012, 8:50 am

    For those of us in a funded scheme it will hand a huge windfall to the company sharehders who have already had a pension contribution hidatsa in the 1990s.

  4. David Quinn
    Apr 16th 2012, 7:50 pm

    It is clear that the government’s claims about CPI are mathematically bogus. The government claims that CPI, by using geomtric mean, mimics (note they are not claiming it measures) people’s tendency to trade down to lower priced brands as prices rise. The idea is that GM (as opposed to arithmetic mean (AM)) dampens the effect of higher priced goods in the average and so mimics people buying lower priced goods. However, when the GMi sused it is actually averaging price rises not prices. So if the percentage rise in lower priced goods is higher than the percentage rise in higher priced goods then the GM would be mimicking people substituting higher priced goods for for lower priced goods. This is in a paper by Dr Gareth Jones, ex ONS director. What is more there is no actual evidence that substitution takes place at all. A paper by Dr Mark Courtney for the BA pension fund quoted a number of named studies which showed there was virtually no substitution. Lord Freud submitted evidence to the recent judicial review appeal claiming Australian studies found substitution but he didn’t name them. The judges seemed to accept his word. He is a lord I suppose. The concept is clearly nonsense. Think of it this way. Do Tesco sell lower branded goods today than they did 30 years ago? It is obvious they do not. They, like all supermarkets, have moved up market. Yet if CPI had been in operation in those 40 years it would have assumed automatically that people were contiinually trading down, jsut because of the way it is calculated. It assumes substitution all the while. We are being robbed by government lies and fake mathematics. No-one in the press or the judiaciary or Parliament seems the elast bit interested.