The Retail Prices Index (RPI) was given a stay of execution in January.
In recent years, the RPI has fallen out of favour. The Government – and the Treasury in particular – has preferred to use the Consumer Prices Index (CPI) for indexing tax allowances and benefits. There are two main reasons for the move away from the RPI towards the CPI:
- The way in which the two indices are calculated means that the RPI will usually produce a higher number. For example, over the last ten years to December 2012 the CPI averaged 2.6% a year while the RPI averaged 3.3% a year. For a Government anxious to maximise tax revenue and minimise expenditure, the choice is obvious.
- The method used to calculate the RPI is widely accepted as flawed, whereas the CPI follows international standards (under another label it is the EU yardstick for UK inflation).
Last October the Office for National Statistics (ONS) put forward a consultation paper with four options for dealing with the gap between the RPI and CPI. Three of these would have brought the two indices closer together by moving the RPI calculation nearer to the CPI basis. The fourth option – do nothing – was widely seen as a straw man that ran counter to the thrust of the ONS’s consultation.
It was therefore a big surprise when the ONS announced in early January that ‘no change’ was its recommendation, and that this had been accepted by the UK Statistics Authority. The decision to leave the RPI calculation untouched is good news if you have:
- index-linked savings certificates;
- index-linked government securities; or
- an RPI-linked pension.
All would have performed less well if the RPI had been engineered downwards. The losers include the Government, which might have saved up to £3 billion a year if RPI had been cut down, and private sector final salary pension schemes, whose liabilities did not fall as they had hoped.
8th February 2013
