RPI to CPI Early Day Motion 1032

Stargazer57

Ripoff wrote: »

RPI up again to 4.8% but CPI lagging behind at 3.7% how can they justify CPI as a better measure of pensioner inflation when they know that CPI has a built in flaw of between 0.4% to 1% between the two measures, because of the formula effect and the missing housing costs (Council Tax).

Can you remind me why the CPI formula is inherently inferior to the RPI one? And why the effect of Council Tax should be included when other taxes, such as Income Tax, are not?

JohnB47

Goldwing1 wrote: »

I've received a reply from Damian Green (Cons). It states:


"Thank you for your further e-mail of 13th January.
I have written to Pensions Minister Steve Webb on your behalf, highlighting the quote from the House of Commons Library brief to which you referred to in your earlier e-mail of 23rd December and asking whether he can confirm that the Government considered the view of the UK Statistics Authority.

I will, of course, let you know when I receive a response from Steve Webb. "

While it is only asking the question, I believe it is a step forwards. :j

This may be of interest. Steve Webb 'considered' their view all right, meaning he read it then ignored it because it didn't suit the Governments argument. Let's all keep this up.

http://www.theyworkforyou.com/wrans/?id=2010-12-21a.32228.h

JohnB47

Just found this. Too weighty for me but others might have time and inclination to make sense of it. Appendix 3 and 4 lists the basket of goods for RPI and CPI.

http://www.statistics.gov.uk/downloads/theme_economy/CPI_Technical_manual-2010.pdf

Oh and also:

http://www.theyworkforyou.com/wrans/?id=2010-12-14a.160.1&s=CPI#g160.3

By the way, if you go to the 'theyworkforyou.com' website and search for CPI, you get all sorts of questions and answers. That's how I found the above (and the one on my previous post).

Interested_Taxpayer

JohnB47 wrote: »

I'm really annoyed that I missed the chance to pose a question on the Guardian interview - I got there too late.

So I replied to my MP instead. Here is the text:

Dear Hugo Swire,

I wrote you you recently about the Governments proposal to replace RPI with CPI as the uprating index for pensions. I have now received your reply, for which I thank you but I would like to ask a further
question.

While in opposition, George Osborne wrote in the Conservative document ‘An Unfair Britain’ -

“Pensioner inflation is now considerably higher than CPI inflation
because pensioners spend a much higher percentage of their income on high-inflation goods, like heating, light, and food.”

He then quoted figures from the Office for National Statistics website which showed that pensioner inflation in 2008 was greater even than the RPI measure.

Yet, in your letter, you say:

“…. The Government believes the CPI provides a more appropriate measure of pension recipients' inflation experiences and is also consistentwith the measure of inflation used by the Bank of England. The CPI uses a methodology that takes better account of consumer behaviour in response to price increases....... CPI is a more appropriate measure of changes in the cost of living of pensioners and benefit recipients than RPI.”

Can you please tell me why the Governments position is now exactly the opposite of that held by the Conservative party, your coalition
partners, while in opposition? The pattern of pensioners spending can't have changed significantly, nor can the way CPI is used to measure inflation.

The only conclusion to be drawn is that this is simply a stealth tax on pensioners, who have for years paid into their respective schemes in the expectation that payments would increase according to the September RPI figure. I understand that the September CPI figure has always, apart from two instances, been lower than RPI and I think that it is disgraceful for any political party to reduce a pensioners income like this. Many people in receipt of their occupational pension are no longer in a position to do anything that would make up the shortfall that would result from this proposed change. It is simply not fair.

Why anyone would start a pension plan when they see Governments doing this sort of thing is beyond me.

I would be grateful for a response.

Yours sincerely,

Well done. Very handy letter.
Ripoff covered this in one of his Guardian questions. However, I suspect he will get a very similar answer from Steve Webb to that given in his reply to the Rachel Reeves's written question as reported earlier by JohnB47.
Will we get the chance for further input in the Guardian though? If we don't then a letter to the Editor might be in order.

Prof_as_was

Stargazer57 wrote: »

Can you remind me why the CPI formula is inherently inferior to the RPI one? And why the effect of Council Tax should be included when other taxes, such as Income Tax, are not?

'Inferior' I don't really understand, but the ONS (who know) says it's inherently lower because their formula for calculating it makes it so. Don't most or all indirect taxes feed into the inflation figures - VAT, fuel levy, drink and tobacco excise?

Mind you, with advancing years, I don't drink as much as I used to. Maybe there's a case for some really sophisticated hypothecating and tapering to be done about age-related expenditure, before we're forced round to the really simple and effective solution, euthanasia. In the meantime, its a contract, we've kept our side - and we're still tax-payers.

cvd

Maybe there's a case for some really sophisticated hypothecating and tapering to be done about age-related expenditure

On average, inflation increases with age for poorer pensioners. Many older people have to pay others to do things that they were once able to do for themselves. This effect is not allowed for in any of the inflation indices. In addition, they often have little opportunity to substitute cheaper things for more expensive things - which is the justification for the formula in the CPI.

It is in the country's interest that inflation is underestimated. This causes a downward pressure on "real" inflation because wage demands will be lower and companies/professionals will find it harder to justify increases much above the inflation measure. This is the only real objective justification for using CPI.

Unfortunately, Webb and Osborne have not appreciated this point. So recent announcements about increases in train fares and the rate of interest on student loans have been in terms of RPI and not CPI. This means that the government is not planning a wholesale change from RPI to CPI. So the only sensible conclusion is that the use of CPI is just a cost saving measure aimed at public sector pensions. Unfortunately a lot of innocent people are being caught in the crossfire - the changes to BT pensions is just one example. Also, it is not even an equitable adjustment. Some public sector pensioners will be hit much harder than others - many wealthy public sector pensioners will not notice the difference.

Ripoff_2

Stargazer57 wrote: »

Can you remind me why the CPI formula is inherently inferior to the RPI one? And why the effect of Council Tax should be included when other taxes, such as Income Tax, are not?

I will try to explain as it may also help other new joiners to this post.

There are two methods of working out the mean (Average) one uses an Arithmetic method (RPI) and the other uses a Geometric method (CPI) the two methods produce a variance when compared with each other, this is the formula effect. CPI was never designed for the use of measuring domestic inflation, it was designed to measure the inflation based on a standard basket of goods between counties in Europe, and therefore using a Geometric mean was not an issue. The fact that using a geometric mean gives a lower calculation when compared with RPI is the issue and therefore causes the formula effect of about 1%.

Dropping down to CPI therefore lowers the inflation figure by 1% but not because the inflation rate is lower but because the calculation of the mean is different. RPI is the valued, trusted and recognised measure of UK domestic inflation and has been for 38 years. This change is a cynical move by the Government to lower pensioner incomes by using a measure CPI that they know causes an inflation measure of at least 1% less than RPI. It will continue to do so 99.9% of the time, therefore the 1% variance is going to always be present.

The Government also knows that there are missing measures from CPI such as housing costs, and vehicle excise duty. These are missing because they are not compatible with other European countries, which enable the BOE to measure inflation between countries on a like for like basis. Other countries do the same by using CPI to measure like for like but no other country uses CPI as it’s domestic inflation measure they have their equivalent of RPI and RPIx, because they are also aware that CPI is not designed for measuring domestic inflation.

The missing Council Tax measure is important because it is not really a Tax like income tax that is taken from source and therefore does not contribute to your inflation, income tax lowers or raises your income. Where as Council tax is actually a bill, like a petrol bill, it is taken from the income you have to spend, therefore it does contribute to your inflation. Council Tax, should really be called Council Bill because that’s what it is but worse than that it is a bill you can not avoid no matter how high it rises. With other bills you incur, such as a petrol bill you can try and use the car less but with a Council Tax Bill you have to pay it by law, you can not reduce it or avoid paying it. Hence why it is so important that it should be counted, not to count it in the inflation measure is unjustifiable. This is why RPI includes it and if the Government really wanted to represent pensioner inflation, then they could use RPIx, which does not include mortgage interest payments as that is what they said was the justification for the change to CPI.

But no they want to use a measure that they know delivers an inflation rate time and time again lower by at least 1% than the actual inflation rate.

Hence why this change is not only deception but also theft and a betrayal of the whole pension concept.

Ripoff_2

If any one still doubts why this fight has to be fought then please read this [URL="mhtml:{6EF71D81-FCE8-447B-947D-380BDD9A9C3B}mid://00000010/!x-usc:http://www.telegraph.co.uk/finance/economics/interestrates/8267234/Elderly-are-left-700-a-year-worse-off-as-inflation-jumps.html"]http://www.telegraph.co.uk/finance/economics/interestrates/8267234/Elderly-are-left-700-a-year-worse-off-as-inflation-jumps.html[/URL]

JohnB47

Ripoff wrote: »

If any one still doubts why this fight has to be fought then please read this [URL="mhtml:{6EF71D81-FCE8-447B-947D-380BDD9A9C3B}mid://00000010/!x-usc:http://www.telegraph.co.uk/finance/economics/interestrates/8267234/Elderly-are-left-700-a-year-worse-off-as-inflation-jumps.html"]http://www.telegraph.co.uk/finance/economics/interestrates/8267234/Elderly-are-left-700-a-year-worse-off-as-inflation-jumps.html[/URL]

Thanks but your link didn't work for me so I stripped off some leading characters that appeared in the address bar. This works, I think:

http://www.telegraph.co.uk/finance/economics/interestrates/8267234/Elderly-are-left-700-a-year-worse-off-as-inflation-jumps.html

Stargazer57

Ripoff wrote: »

There are two methods of working out the mean (Average) one uses an Arithmetic method (RPI) and the other uses a Geometric method (CPI) the two methods produce a variance when compared with each other, this is the formula effect. CPI was never designed for the use of measuring domestic inflation, it was designed to measure the inflation based on a standard basket of goods between counties in Europe, and therefore using a Geometric mean was not an issue. The fact that using a geometric mean gives a lower calculation when compared with RPI is the issue and therefore causes the formula effect of about 1%.

Dropping down to CPI therefore lowers the inflation figure by 1% but not because the inflation rate is lower but because the calculation of the mean is different. RPI is the valued, trusted and recognised measure of UK domestic inflation and has been for 38 years. This change is a cynical move by the Government to lower pensioner incomes by using a measure CPI that they know causes an inflation measure of at least 1% less than RPI. It will continue to do so 99.9% of the time, therefore the 1% variance is going to always be present.[/B]

Now I am confused.

If you read this document:
http://www.statisticsauthority.gov.uk/assessment/monitoring/monitoring-briefs/monitoring-brief-7-2010---communicating-inflation.pdf
particularly appendix 3, the conclusion, of the professionals at the ONS and UKSA, is that the geometric mean is a better method, and for that reason, it is possible that the RPI itself will switch to using it. The only merit they can find with the arithmetic mean is that is has been used for ages, not that it is correct.

Now you can pull the wool over the eyes of posters on this board by ignoring these arguments, but if you don't deal with them when writing to MPs your letters will lose impact because most MPs will be aware of these points.

Ripoff wrote: »

Council Tax, should really be called Council Bill because that’s what it is but worse than that it is a bill you can not avoid no matter how high it rises. With other bills you incur, such as a petrol bill you can try and use the car less but with a Council Tax Bill you have to pay it by law, you can not reduce it or avoid paying it.[/B]

I know lots of people who have avoided Council Tax increases. Some have moved to a smaller house, others have changed area. Over the last decade income tax rates have fallen but Council Tax has shot up. I don't see why this should mean that pensions, which are used to pay both, should respond to one but not the other.