Are inflation measures on an even level when it comes to pensions and benefits, train fares, loans and household bills?
When determining price hikes or increases in benefits and pensions, a mix of both the Retail Prices Index, (RPI), and Consumer Prices Index, (CPI), are used.
Both measure inflation by looking at the changing prices of a selection of everyday goods and services but, crucially, they cover different items.
And because of the way the figures are calculated, the RPI figure is often higher than the CPI.
And, rightly or wrongly, this often counts against the public.
CPI is the go-to choice
As it stands right now; RPI is 3.6% and CPI 2.6% and it’s CPI that’s the Government’s preferred measure of inflation.
This stems from an announcement back in the 2010 Budget that RPI would no longer be used as the measure to increase benefits and pensions and instead, that the Government would use the ‘lower’ CPI figure.
So on the one hand, a cost cutting move for the Government, which some would argue was to boost their coffers with extra cash at the expense of pensioners and those on benefits.
The Office for National Statistics, which produces the official stats, says there’s no rule in place that states which measure of inflation should be used across the board.
And while benefits aimed at pensioners and disabled people are pegged to the CPI, other costs including train fare hikes and interest rates on student loans are pegged to the higher RPI rate.
Why is this?
“There are specific reasons in each case why either CPI/RPI inflation measures are used,” a Treasury spokesperson said.
“Compared to other measures of inflation, CPI inflation has a basket of goods and services that more accurately represent the inflation experience of pensioners and benefit recipients”.
However by contrast, the calculation for RPI inflation is based on, “spending estimates that do not include pensioner households that are dependent on state benefits”, according to the Treasury.
And there’s also a ‘new’ headline measure of inflation, known as CPIH, on the table.
“By comparison, CPIH reflects the housing costs of owner-occupiers and as the majority of benefit claimants are not owner occupiers, CPI is a more suitable use of inflation”. CPIH is currently 2.6%.
However with price rises on train fares the Treasury defend the use of the RPI rate, saying it, “carefully monitors how rail fares and average earnings increase”, and that the “use of RPI is consistent with the general approach adopted across the rail industry and the Office for Rail and Road”.
And when it comes to using the RPI rate to calculate the interest rate on student loans; a Treasury spokesperson says “the interest rate on student loans shouldn’t be viewed in isolation, as they are part of a bundled financial support package that offers borrowers unique protections not available from any commercial lender”.
It cites the fact that borrowers are ‘protected’ as repayment terms are based on income; not the amount borrowed and borrowers earning below £21,000 are not liable for any repayments.
So CPI or RPI?
CPI is the rate included in the ‘triple lock’ that ensures the annual rise on State Pensions.
So each year, pensioners get the highest increase from inflation (CPI), average earnings or 2.5%.
Benefits for disabled people
Benefits and support for the disabled including Personal Independence Payment, (PIP)/Disability Living Allowance (DLA) and Attendance Allowance, are all pegged to CPI when it comes to annual increases.
CPI or less
Any increase in “social security benefit rates each financial year is normally based on inflation, with CPI used as the ‘default’ measure”, according to the Government.
However, in reality, many benefit increases have actually been ‘frozen’ until April 2020 according to the poverty charity Turn2Us.
This includes ‘working age benefits’ like Jobseeker’s Allowance, Universal Credit, Housing Benefit and Income Support.
This month it was announced that rail fares are due to go up by 3.6% from January 2018 and it’s the ‘higher’ RPI rate that’s used here to calculate the rise in ticket prices.
When working out the interest rate on student loans; it’s the ‘RPI’ rate that’s used.
And it’s the March figure that’s used in calculating the interest rate that applies to student loans.