Inflation deflation
The Government is beginning to change the rate of inflation it uses to put things up each year. In the past it has always used the Retail Prices Index (RPI) which has been around since the 1940s. But now it seems to be moving towards the new, and much lower, Consumer Prices Index (CPI). In the long term that could be bad news for us all.
In the last week the Government has announced that prescription charges will go up by 3% “around the rate of inflation” to £6.85 an item (except in Wales where prescription charges will be scrapped from 1 April) and that the pay of nurses, doctors and other public sector workers will rise by 2% this year “consistent with the Government’s inflation target”.
Since 2003 the Government has used the CPI to set its inflation target at 2% and the latest figures show inflation on this measure is 2.7%. But that is far lower than the RPI which shows prices rising by 4.2% a year. That is because the RPI includes housing costs such as mortgage interest and council tax which the CPI does not take into account.
When he made the change to CPI the Chancellor said “I can confirm: pensions, benefits and index-linked gilts will continue to be calculated on exactly the same basis as now.” Which was a relief because if the basic state pension had been put up in line with the CPI from then on it would be nearly £4 a week less this April - £83.35 instead of £87.30. And it was not just the things on the Chancellor’s little list that carried on using the familiar RPI. Just about everything that rises with inflation – from wages to index-linked National Savings certificates – goes up each year in line with the old RPI.
In the long term it does not make sense to have two official rates of inflation. And it is beginning to look as if the CPI kite is being gently flown by the Government. Take those prescriptions charges. Of course it is good news for those of us who are under 60 and pay them that the rise will only be 20p an item, rather than the 30p if it was linked to RPI. But using the CPI instead of the RPI is a first, perhaps to see if anyone notices.
This year is also the first time that the CPI has explicitly been used to work out the increases in public sector pay. Civil servants, prison officers, NHS staff, will see their pay rise by between 2% and 2.6% (except for the armed forces who will get more). The Chancellor is comparing that rise not with the 4.2% RPI – it is barely half that – but with the 2% “Government’s inflation target” which is measured by the CPI.
The annual pension increase will probably stay linked to the RPI for many years yet. But watch out for CPI creep as a growing number of annual increases use this new upstart instead of its more expensive older cousin.
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