The Office for National Statistics could be the new wicked witch of personal finance if its proposed changes to the way inflation is measured go through. Would a change in RPI affect your finances?
It’s not often that number crunchers make the front pages. But over the next few weeks, the Office of National Statistics (ONS) may come under the spotlight by recommending a small change to the way inflation is calculated. The change could leave thousands of UK savers, investors, pensioners and benefit claimants out of pocket.
The Retail Prices Index (RPI) is one of the two main measures of UK inflation – the other being the Consumer Prices Index (CPI). You can tell how quickly the cost of goods and services is rising or falling by seeing how much these two price indexes change.
Why not wave goodbye to RPI?
Due to the differences in the way CPI and RPI are calculated – RPI has historically always been higher than CPI. In fact, it’s been an average of 0.9 percentage points higher, and the government’s Office for Budget Responsibility predicts this will widen even further in the future, to around 1.5 percentage points.
But the Office of National Statistics is considering changing the way it calculates RPI to bring it closer to CPI – a move which would cost some thousands. If, for example, CPI rose by an average of 2% a year, and RPI rose by 3.5% a year, someone who retired today with a pension of £30,000 a year rising in line with RPI would have an income of £84,203 in 30 years time. Yet if their pension was linked to CPI, it’d only be worth £54,340.
Innovation to change inflation
Considering that a reduction in RPI saves the government billions of pounds, it’s not hard to see why it might welcome moving the two measurements closer together. In fact, the government has already taken the unpopular step of changing the link for public sector pensions and state benefits from RPI to CPI.
In reality, I don’t think any measures of inflation are particularly useful – each person’s cost of living moves at different rates. How hard could it be to come up with multiple measures of inflation that reflect people’s life stages, rather than using averages for the whole nation?
The ONS is still to decide whether to recommend the change – but if it did, would it have a detrimental effect on your finances? Are any of your current financial products already linked to RPI? Have you bought a product linked to RPI in the past few months?