Questions from pensioners dominated a meeting about inflation measures held at the Royal Statistical Society on Tuesday. The rise in inflation to nearly 5%, when December’s figures were released last week, would have been enough to test the patience of those on low and fixed incomes. But what has really unsettled the retired is the government’s decision to change the uprating rules. It announced that, come April, the new-kid-on-the-block CPI (Consumer Price Index) will be used in the calculation of pension increases, instead of the RPI (Retail Price Index) which has been around for generations. There is a useful briefing note here from the National Pensioners Convention explaining what is happening.
So what, right? Both indices measure inflation by weighing the average change in prices on common household goods and services. However, in practice, key differences in methodology between the two measures, combined with variances within the items measured – all rather technical and unimportant sounding things – have at times created a rather drastic difference between the two. The chart below shows the variation of CPI and RPI over the last decade and that pensioners would have lost out had the change to CPI already been in place. Hence the unhappiness:
CPI and RPI, selected headline indices, UK from Timetric
While the RPI generally displays a higher rate of inflation than CPI, it does not do so always. One of the biggest differences between the two measurements is that RPI includes the cost of housing, as indicated by changes in the mortgage rate payment average, which is in turn determined by changes in the interest rate and the cost of housing. Hence the giant fall in RPI right around the time the housing market collapsed in 2008-09.
From September 2008 and throughout 2009, the RPI index was lower than the CPI index, almost entirely due to the drop in mortgage payments and housing prices. (The key month for benefits is September as that month’s rate uprates benefits in the following April.) Excluding housing costs from the RPI measurement (the ONS produces the RPIX which does exactly that), there is a considerably less dramatic difference between the RPIX and the CPI. See the chart:
CPI and RPI, selected headline indices, UK from Timetric
Why does the government want to shift to the CPI? Neatness perhaps – as the Bank of England uses that for setting interest rates. But does it really make much sense to the pensioners? Of course, by age 60, most pensioners have paid off their mortgages, which makes the traditional RPI measure (which includes a mortgage element) an inexact reflection of the inflation faced by seniors. Yet, the shift to the CPI also fails to match pensioners’ spending – among many other items, it includes the spending of tourists visiting the UK and student fees! Perhaps the main thinking in government is that the switch, the cynic would say, saves money (by paying smaller increases in pensions and other benefits).
To reflect the fact that pensioners, with different product preferences than the average UK household, generally face a different overall rate of inflation, the ONS has for a long time produced measures for pensioners. But it hasn’t promoted or explained them.
What do the pensioner measures show? For the first part of the last decade, the RPI rate for both single-pensioner and dual-pensioner households has generally been lower than the overall RPI or RPIX rate, suggesting that pensioners did OK:
Since 2006 and particularly during the 2008 crisis, however, the pensioner RPI rates shot up compared to the national average, indicating that pensioners have experienced a higher rate of inflation – and a general decrease in real income - more recently than other demographics. So perhaps the fairest uprating to use would be the pensioners’ index and neither the RPI nor CPI. Comparing the CPI and pensioner RPI rates shows how consistently seniors are likely to lose out following the shift:
The grievance of pensioners, who rely heavily on savings, has been increased by the low interest rates since the banking crisis. It means they have already suffered a cut in savings income, a small uprating and higher rates of inflation. This is not the time to tell them that there is going to be a switch to the CPI index which is likely to lead to a further reduction in real income value in the next few years.
Thank you for the above information, I will send it to the National Pensioners Convention and ask them to put it on their website, I have also taken a few copies to give to PPA members, I am not certain that many people know of the implications of this change, and what it will mean to them long term.
Pensioners are having to manage higher utilitiy, food , petrol, and many more increases on a lower income, some occupational pensions put a freeze on last years payments, I know I was one of them.
State pension is about £95 for a single pensioner and £135 for a couple this does not stretch very far in todays market. To change from RPI too CPI would mean a reduction of income of £1 a week rising to £8 a week over 6 years, and that is before inflation reached 5%, pensioners have worked for their pension and put money into the British economy, infrastructure, what more can we have done? now the CPI is based on foriegners arriving in England, people who will take from our country and send their income to their own lands, this is surely not right, what is to happen to our grandchildren are they to become second class citizens as the pensioners are at the moment.
I have a rather disturbing story for you, I had to travel on the train to London and I read an article in the Metro Mail newspaper Friday 21 January which said, a mother from Cambridgeshire went to enrole her child into the Missing Links playgroup, a council funded group set up for non British residents, and was refused a place, how can this be right for an indigenious mother to be refused entry for her child.
I state the Metro article I have told you of is solely my doing and nothing to do with the NPC, all other information contained in this blogg can be used in my name as a member of the NPC.
When I was leaving the RSS building I asked a gentleman who was at the meeting what he thought of it and he had once worked for the ONS and told me to write to the Chairman, when he worked for them their ethos was to look after the pensioner, I was very supprised to hear the European Parliment was the directive behind the change from RPI toCPI, I have since found out from their website he is newly appionted Director, appionted by the Goverment, and I intend to write to him.
Thank you again for the information and I hope we can collectively bring about a change in the governments thinking.
Kind Regards
Mrs Cork