In­fla­tion swin­dle: how you lose out

The Daily Telegraph - Your Money - - FRONT PAGE -

The Gov­ern­ment can choose be­tween two mea­sures of in­fla­tion – and the pub­lic al­ways comes off worse, says Sam Brod­beck

Con­sumers are be­ing short­changed to the tune of bil­lions of pounds a year be­cause the Gov­ern­ment “cooks the books” when it cal­cu­lates in­creases in the state pen­sion and in var­i­ous costs such as stu­dent loan re­pay­ments and rail fares. It does this by se­lec­tive use of the for­mu­las used to al­low for in­fla­tion – some­thing that mat­ters more than ever now that prices are ris­ing at their fastest pace for five years.

In­fla­tion is usu­ally mea­sured us­ing one of two in­dices, the con­sumer prices index (CPI) and re­tail prices index (RPI). Both re­flect the monthly change in the cost of a “bas­ket” of goods and ser­vices.

But they dif­fer, of­ten by a per­cent­age point, be­cause they track the costs of dif­fer­ent items and cover dif­fer­ent parts of Bri­tain’s pop­u­la­tion. For in­stance, CPI does not take into ac­count mort­gage re­pay­ments. For Septem­ber, the lat­est month for which data is avail­able, the rise in the CPI was 3pc while RPI in­creased by 3.9pc.

The dif­fer­ence may seem small but it has al­lowed the Gov­ern­ment to save bil­lions by, for in­stance, rais­ing state pen­sions us­ing CPI, which is al­most al­ways lower (see graph, right), but in­creas­ing train fares, stu­dent loans and other costs in line with RPI.

The Gov­ern­ment ar­gues that it uses one mea­sure in pref­er­ence to the other where it is “more ap­pro­pri­ate” to do so. Yet economists say suc­ces­sive gov­ern­ments have made changes cyn­i­cally to save bil­lions of pounds on the quiet.

This sum­mer the Of­fice for National Sta­tis­tics, Bri­tain’s in­de­pen­dent data body, branded RPI “flawed”, the lat­est in a se­ries of crit­i­cisms.

Its di­rec­tor gen­eral, Jonathan Athow, said the index would con­tinue to be pro­duced for “legacy uses” but warned that RPI had “se­ri­ous short­com­ings” and that the ONS “did not rec­om­mend its use”.

More than a decade af­ter the Bank of Eng­land it­self switched from RPI to CPI for its of­fi­cial in­fla­tion tar­get, or­di­nary peo­ple are still los­ing out.

Martin Lewis, founder of MoneySaving­Ex­pert.com, said: “Where it costs us more, they use RPI. Where it costs the state, they use CPI. There is no log­i­cal jus­ti­fi­ca­tion, it does not make any sense what­so­ever.

“It’s a very sim­ple way of cook­ing the books.”

The Coali­tion gov­ern­ment switched to us­ing CPI for in­creas­ing ben­e­fits, in­clud­ing the state pen­sion, and tax cred­its from April 2011. Pub­lic sec­tor “fi­nal salary” schemes, such as the NHS and teach­ers’ plans, were also moved to CPI-based in­creases.

At the time, the Of­fice for Bud­get Re­spon­si­bil­ity, the spend­ing watch­dog, said the Gov­ern­ment would make a com­bined sav­ing of about £250bn over the com­ing decades as a re­sult of the change.

For the mo­ment, the state pen­sion is pro­tected by the “triple lock”, mean­ing in­creases are the high­est of CPI in­fla­tion, earn­ings growth or 2.5pc. Com­muters al­ready have to deal with train de­lays and fre­quent strikes. Train com­pa­nies bear the blame, but it is the Gov­ern­ment that sets a cap on fare in­creases.

Since 2014 the De­part­ment for Trans­port has set the an­nual in­crease in “reg­u­lated” fares, which in­cludes most sea­son tick­ets, at RPI. Each Au­gust, the July rate of the in­fla­tion index is used to set the per­cent­age by which rail op­er­a­tors will raise fares the fol­low­ing Jan­uary. Us­ing CPI in­stead of RPI would have saved some­one com­mut­ing from Brighton to Lon­don £228 over the past three years, ac­cord­ing to the Cam­paign for Bet­ter Trans­port.

As it is, fares will rise by up to 3.6pc in Jan­uary. By com­par­i­son, av­er­age wages are grow­ing by just 2.1pc a year, ac­cord­ing to of­fi­cial fig­ures.

Since the in­tro­duc­tion of the stu­dent loan sys­tem un­der Tony Blair’s Labour ad­min­is­tra­tion, grad­u­ates have grap­pled with an in­creas­ingly com­plex sys­tem. There are now two dif­fer­ent plans with dif­fer­ent lev­els of fees, salary thresh­olds – and in­ter­est rates.

Those who started a univer­sity course be­fore Septem­ber 2012 are on “plan 1” and have paid the rel­a­tively low in­ter­est rates you’d ex­pect in an era when Bank Rate has been at record

Stu­dents and rail users both end up pay­ing more be­cause the Gov­ern­ment uses RPI to cal­cu­late in­ter­est rates on loans and in­creases in fares

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