Inflation swindle: how you lose out

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