Ian Cowie: Struggling pensioners suspect CPI is the Chinese Prices Index

Section:

By Ian Cowie
The Telegraph, London
Tuesday, August 17, 2010

http://blogs.telegraph.co.uk/finance/ianmcowie/100007362/struggling-pens...

From the chart at the link above you can see why the Government proposes to measure inflation by the Consumer Prices Index or CPI, which we are told today is rising at an annual rate of 3.1 per cent rather than the Retail Prices Index or RPI, which is more than half as high again at 4.8 per cent. Both figures fell slightly in the year to July -- from 3.2 per cent and 5 per cent respectively in June -- but CPI will produce much lower costs for the Government and employers when they calculate how much pensions should rise in future.

Unfortunately, as far as many pensioners' daily experience of the rising cost of living is concerned, the CPI might as well be the Chinese Prices Index. It bears little or no resemblance to the bills they must pay because, among other factors, CPI does not include housing or heating costs.

... Dispatch continues below ...



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Falling prices for electronic goods such as iPads and iPods may be good news for the young but largely irrelevant to older people, who may spend more of their income on food and keeping warm. For example, gas and electricity absorb twice as much of many pensioners' income than these fuel bills do for younger people, who earn more and spend less time at home, according to calculations by Alliance Trust. The Scottish financial institution's analysis of inflation rates facing different age groups last month found that the over-75-year-old age group suffered a sharp increase in inflation, from 3.3 percent to 3.6 percent, driven largely by higher food price inflation. For the ninth consecutive month people aged between 50 and 64 years old faced the highest rate of inflation in the year to July, at 4.5 per cent.

Of course cynics argue there are different sorts of statistics and damned lies. Your personal experience of inflation depends on what you buy. People aged over 75 spend an average of 7.7 percent of their income on gas and electricity, according to Alliance, compared to less than 4 per cent for those aged less than 30. However, petrol absorbs less than 3 per cent of the typical older pensioner's income compared to more than 3 percent of incomes for those aged between 50 and 64 years old.

However, for the first time in 30 years, from next April pay rises will be taken into account when the basic state pension is uprated in line with inflation. At present, indexation of pensions is calculated in line with the annual rate of increase in the retail prices index (RPI) in September or 2.5 percent, whichever is greater.

In his Emergency Budget, the Chancellor introduced a "triple lock" to index 11 million people's pensions plus State benefits and tax credits received by millions of others. These will rise in line with the bigger of earnings or price inflation or 2.5 percent per annum.

Most people welcomed the change because earnings have tended to rise faster than prices in the past -- although whether that remains true in "austerity Britain" remains to be seen. Pay cuts are more likely for many than pay rises in the years ahead.

But a less obvious and potentially bigger problem to bear in mind is that next April will be the last time RPI is used to measure price inflation for the indexation of State and company pensions, benefits and tax credits. After that, the CPI will be used.

It's just a pity that in the real world most pensioners will have to buy food and fuel at British prices rather than the knock-down rates available in Kowloon or Shanghai.

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