RPI to CPI Early Day Motion 1032

BoxerfanUK

It would have helped immensely if the Guardian online discussion had been left open so that after Steve Webb had left people would have had the chance to debate what he said, and as importantly, what he didn't say. I must admit I was getting very impatient and frustrated waiting for answers. :rotfl:

paul.n_2

Originally posted by markr007 actuary!


A few things from reading some of these posts:


- The geometric mean effectively assumes that when prices rise people buy more of cheaper brands than before which seems inherently sensible.
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Which is why it's always incorrect, buy cheap washing up liquid and it lasts around 80% less time than the good stuff, the same applies to most supermarket products and most clothing too.
Buy a cheap exhaust system for your car you'll be lucky if it lasts a year.
Same rule applies to everything from toilet paper to denture fixative, shampoo, razor blades, towels, you name it.

And all part of why the true cost of living is higher if your'e poor and trying to save money, than it is if your'e rich.
The vast majority of people, not just pensioners in this country fall into to 'poor' category.


Unfortunately the manufacturers aren't as naive as you are.

Stargazer57

paul.n wrote: »

- The geometric mean effectively assumes that when prices rise people buy more of cheaper brands than before which seems inherently sensible.
________________________________

Which is why it's always incorrect, buy cheap washing up liquid and it lasts around 80% less time than the good stuff, the same applies to most supermarket products and most clothing too.
Buy a cheap exhaust system for your car you'll be lucky if it lasts a year. ......

I think you and markr have got a bit hung up on "brands".
An index based on an arithmetic mean implicitly assumes that people buy the same quantity of good regardless of the price. One based on a geometric mean implicitly allows for people to buy less of goods that have risen in price and more of ones that are relatively cheaper. To explain this don't think of brands, but think of buying fruit and vegetables when they are in season. Similarly, if train fares have risen by more than petrol, you'ld expect people to switch, to some degree, from rail to road. The RPI makes no allowance for this except at its infrequent adjustment to the basket of goods, but the CPI, with its superior formula, does.

It is common sense really.

Encouraging people to write to their MPs condemning the "formula effect" will merely lead MPs to think you don't understand the issue.

cvd

its infrequent adjustment to the basket of goods

It is adjusted every year. Exactly the same as pensions.


ProfAsWas

For me, the discussion about "appropriate" inflation indexing for different classes, or even for individuals, according to need or as experienced, is interesting, (surely leftish?) stuff, but beside the point and the wrong issue for threatened OP holders. Its not a bloody benefit, not a handout to the poor old needy! Its a contracted investment deal, and I've met the terms of payment for 40 years.

I am not qualified to comment on much of what you have said. Just on the remark "surely leftish? No it is not leftish in the sense of being politically motivated. The problem of devising an inflation index is not trivial and the first thing to do is to specify the objective of the index. I pointed out that inflation differs between individuals and between different income groups.
Webb and Osborne have claimed that the CPI is more suitable for pensioners - so their objective is "which of the current indices is most suitable for pensioners?". In fact they clearly do not understand the issue because precisely the reverse of their claim is true. Pensioners on much less than the national average income - and there are a lot of them - have far fewer opportunities for substitution assumed in the CPI construction. Indeed, in recent years, their inflation experience has been higher than RPI and as I have pointed out before, the inflation rate of poor pensioners increases with age as an extensive study has shown. And the switch from RPI to CPI will have an increasing effect with age.

Ripoff_2

A milestone has been reached today we have 100 MP's that have now signed the EDM. Keep up the correspondance we still need more.

LAB = 80 LD = 4 CON = 0 oth = 16

shaunrc

Hi
I am an economist who also has all the CII pension qualifications and so I have followed this issue closely since it was first announced. I offer help and assistance on here from time to time. I wrote an article on the problems of the switch when the move from indexing by RPI to CPI for pensions was announced. Here is a link to it.

http://t.co/Kw1rZbU

For those who follow the situation in depth I have a category in my blog on UK inflation and the issues surrounding it. You will see that there are dangers building which makes the proposed move potentially more expensive for future pensioners...

Ripoff_2

All this is what Steve Webb arguments are for switching from RPI to CPI from his post on the Guardian on Thursday.

Thanks for the new questions about CPI/RPI. There's a lot of technical detail on all of this, but here are the key points:

1. We've made two changes to the way pensions are uprated. The basic pension will go up in line with the highest of earnings, consumer prices or 2.5% - a "triple guarantee' to Britain's pensioners. Additional state pensions and public sector pensions will go up in line with the consumer prices index - the headline measure of inflation used in the UK. Taking account of both of these changes, we estimate that a typical person retiring this year with both basic and additional state pension entitlement will be around £10,000 better off over the course of their retirement

2. There are a number of reasons why the CPI is a more appropriate price index to use when preserving the real value of pensions in payment.

a) the RPI includes mortgage interest, which is irrelevant to the vast majority of pensioners - just 7% of pensioners still have a mortgage. Changes in the RPI can be heavily influenced by changes in mortgage rates - as in September 2009 when the RPI went negative and as a result additional pensions were frozen in April 2010. The CPI was positive in the year to September 2009.
b) CPI is the measure of inflation targeted by the Bank of England and is an internationally standard measure of inflation.
c) when the RPI basket of goods is constructed, the spending patterns of the poorest pensioners are specifically excluded, whereas the CPI includes such households;
d) the way that the CPI assumes that households respond to price increases is different to the way it is done in the RPI; the IFS has praised the methodology used in the CPI saying that this was a 'sound rationale' for the switch to CPI;

It is important to add that with regard to company pensions, we propose *not* to over-ride scheme rules, and so where company pension schemes have specifically promised to pay RPI indexation, we will not be intervening to change this.

We acknowledge that the CPI is on average lower than the RPI. However, it is not the Government's role to choose the highest inflation measure available, but rather to choose the most appropriate measure. For the reasons given above, we believe that the CPI is the right measure to use.

cvd

c) when the RPI basket of goods is constructed, the spending patterns of the poorest pensioners are specifically excluded, whereas the CPI includes such households;

This is the typical statement from a politician in this country (of all parties). Whilst true, it just gives partial information.
The RPI also excludes the richest or highest earners whereas the CPI includes the highest earners - that is the reason why, for example, stockbrokers fees are included in the CPI but not in the RPI..

Ripoff_2

All, you can see Steve Webb's position on this from his web chat reply, therefore if you have any counter arguments (which there are many) i.e as the one supplied by CVD could you, if at all possible, please supply the evidence source or the exact quote/details. Thanks

JohnB47

Regarding the following portion of Steve Webbs statement, I found the supporting 'praise' from the Institute of Fiscal Studies website.

"d) the way that the CPI assumes that households respond to price increases is different to the way it is done in the RPI; the IFS has praised the methodology used in the CPI saying that this was a 'sound rationale' for the switch to CPI;"

As usual from a politician, it selectively quotes the document from which the praise is extracted.

Here is the document. Section 5 is the most relevant here but the gist of it is in the conclusion at the top of page 2, which is more or less repeated on page 26, as follows:

"The Government argued that the CPI is a better measure of inflation than the indices to which benefits are currently linked because the way it is calculated allows for the fact consumers are able to protect themselves from price changes by substituting towards relatively cheaper goods, and because the goods and services it covers better reflect the "inflation experience" of households receiving benefits. We find the first of these arguments to be sound whereas the second is more questionable."

http://www.ifs.org.uk/bns/bn108.pdf

From the Publications and Research section of the IFS website:

http://www.ifs.org.uk/publications/5246

By the way, you won't find anything about RPI or CPI by searching for those terms on the IFS website, because the terms are used in related pdf documents which you can view/download but that aren't searched. That's what threw me at first.