The Daily Update - RPI and CPI 'It's a Scandal'

A very quiet start to the week as we enter UK school holidays and the US wakes up after their long Presidents Day weekend.

However, Bloomberg editorial team have put out a great piece looking at the ‘scandal’ that is the use of the Retail Price Index (RPI) for rail fare increases and items such as student loans while using the Consumer Price Index (CPI) for welfare, pensions and so on.

The ‘scandal’ is that the RPI produces a higher rate than the CPI and when the methodology was changed back in 2010 for the calculation of RPI the two measures widened to about 0.8% from 0.5% per annum. In essence this equates to UK inflation linked gilt investors have taken the benefit while commuters and students for instance have seen the reverse.

It is estimated that this actually equates to around £1bln per year in a tax give away to bond investors as the government’s funding cost is higher than utilising the CPI measure as used for payments out and some of these gilts won’t mature until the year 2068.

This situation has been known for years with successive governments using it to their advantage, which is commonly known as ‘index shopping’. Various reviews have concluded it is indefensible, and only last week two parliamentary committees described the situation as ‘grossly unfair’ and ‘a ridiculous merry-go-round’, according to the article.

The problem is that there is not an easy solution, the UK statistics Authority, even has made it known that they believe the RPI measure ‘is not a good measure of inflation’ but with it mandated in law in many cases and in contracts in many pension plans the cost of unwinding the situation appears prohibitive and of course drawn out.

You may have thought that someone, somewhere, would look at the methodology of the RPI measure and adjust it going forward to make it more representative, but no, let’s continue to debate while we ‘index shop’, it’s a good little tool for the incumbent government.

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