RPI to CPI Early Day Motion 1032

Just_Some_Guy

Ripoff wrote: »

Hi All,

After writing to Cameron, Osbourne and Clegg I got yet another standard letter from the DWP but there is one sentance in it that I have not seen before, maybe some of you have but it's very interesting to me, read on.

I quote "The intention of benefit and pension indexation is to protect their purchasing power, not to give the highest increase
possible. Increases in line with the growth in the CPI maintain benefit and pension value, as well as putting the system on a more sustainable footing,allowing us to focus help where it is needed most."

Note the words purchasing power, they are not, it would appear including council tax (housing costs) as a purchased item then? because as it stands CPI missing council tax (housing Costs) and vehicle excise duty, can not by default, maintain purchasing power can it?

Only if the rate of increase of those things exceeds the rate of CPI inflation. Council tax here was frozen this year, so if it was included in the CPI calculation then CPI would be even lower!

Dominic9

Hi Dominic, do you have a link to the OBR document where the bolded calculation is discussed so explicitly? I seem to have missed this one. Thanks.

The numbers are my own calculations. They are derived from OBR forecasts, described below.

Table 3.7 of the OBR report on page 79 shows RPI and CPI forecasts to 2015, at which time CPI is forecast to be 2% and RPI 3.8%

Box 3.5 on page 70 of the report which discusses the long run gap between RPI and CPI, which it concludes is 1.2 percentage points.

The gap of 1.2 percentage points is higher than the gap of about 0.75 percentage points which has been quite widely cited. The gap is larger because the ONS have changed the way they sample clothing to not be so selective about what exactly is a comparator. This results in a wider selection of goods being compared in the clothing category, which due to the CPI using a geometric mean has quite a significant impact.

The numbers I mentioned above start from the current time and use the forecasts up to 2015, then assume that CPI is 2% and RPI is 3.2% after 2015.

JamesU

Dominic9 wrote: »

The numbers are my own calculations. They are derived from OBR forecasts, described below.

Table 3.7 of the OBR report on page 79 shows RPI and CPI forecasts to 2015, at which time CPI is forecast to be 2% and RPI 3.8%

Box 3.5 on page 70 of the report which discusses the long run gap between RPI and CPI, which it concludes is 1.2 percentage points.

Could you tell me which OBR report, year and month this is? I have various pdfs e.g. OBR prebudget, budget, Nov 2010 forecast etc but not sure which report you are referring to where it states a long term differential of 1.2%. Thanks.

JamesU

tonycarew

Just a quick question in the past has CPI actually been higher than RPI,if so in what circumstances and what are the chances of this occurring again.Appologies if this question has been covered already.

Dominic9

Could you tell me which OBR report, year and month this is? I have various pdfs e.g. OBR prebudget, budget, Nov 2010 forecast etc but not sure which report you are referring to where it states a long term differential of 1.2%. Thanks.

Sorry - due to low post count I can't use links.

It is the Economic and Fiscal Outlook, March 2011 I am referring to. I've quoted the passage about 1.2% difference below.

We assume that the larger contribution from the formula effect in 2010 will persist, implying a permanent increase in the difference between CPI and RPI inflation of around 0.3 percentage points. Therefore, if mortgage interest payments grow in line with average earnings growth, we might expect the wedge between CPI and RPI inflation to be around 1.2 percentage points in the long run. However, in our central forecast, mortgage interest payments are rising faster than average earnings throughout, so the wedge is a little largerthan that implied by our long-run estimate.

Just a quick question in the past has CPI actually been higher than RPI,if so in what circumstances and what are the chances of this occurring again.Appologies if this question has been covered already.

Yes, on an annualised basis, several times over the period in which CPI is published (post 1991).

The circumstances are largely when interest rates are falling. Hence the chances are very high that in the future, in some years, it will be higher than RPI (albeit not in the coming years). The chance that CPI will be higher than RPI over a reasonable period, say 5 years, is extremely small.

JamesU

Dominic9 wrote: »

Sorry - due to low post count I can't use links. It is the Economic and Fiscal Outlook, March 2011 I am referring to. I've quoted the passage about 1.2% difference below.....

Thanks for info above Dominic, had not seen this latest report. Have added your link here for other OP's persual:

http://budgetresponsibility.independent.gov.uk/wordpress/docs/economic_and_fiscal_outlook_23032011.pdf

In box 3.5 on page 70 the OBR does indeed describe a longer term differential of 1.2% between RPI and CPI (note: based on the assumption that mortgage interest payments will increase in line with average earnings growth). I used to rely on lower estimates in the region of 0.7% - 0.75% by OBR, budget forecasts, Lord Hutton etc.

Importantly, as described by OBR and ONS the difference between RPI and CPI due to the formula effect was 0.54% in 2009 but has increase permanently by a further 0.32% because of the changes being made by ONS in Jan 10, so the difference between RPI and CPI due to the formula effect is now an overall difference of 0.86% as reported by ONS here:

http://www.statistics.gov.uk/downloads/theme_economy/info-note-cpiandrpi-impact-formula-effect2010.pdf

Steve Webb also used a value of 0.87% as the long term RPI/CPI differential in his recent impact assessment on a switch from RPI to CPI (0.8% formula effect + 0.07% for housing costs) as in the link below:

http://www.dwp.gov.uk/docs/pensions-bill-2011-ia-annexc.pdf


JamesU

cvd

A very interesting article.

http://www.efinancialnews.com/story/2011-04-26/new-inflation-rules-create-pension-lottery?mod=sectionheadlines-PE-AM

Especially the paragraph:

Jerome Melcer, a partner at pensions advisory firm Lane Clark & Peacock, said: “It’s a mess; it’s a ‘small-print lottery’. People have written their pension scheme rules with one intention, and then the government has changed the legislation and there are all sorts of unintended consequences.”

Wolstan_Dixie

For those who don't know:

RPI data: statistics.gov.uk/StatBase/tsdataset.asp?vlnk=229&More=Y

CPI data: statistics.gov.uk/StatBase/tsdataset.asp?vlnk=7174&More=Y

It is easy enough to download the monthly index data for the past 23 years into Excel and draw a graph of the 12 month percentage changes.

It is quite an interesting graph, CPI is much less volatile than RPI.

Ripoff_2

The GREAT PENSION LOTTERY and SWINDLE.
So now we have a two tier private pension system, those lucky enough to retain RPI and therefore higher better and more realistic inflation proofing and those who have been forced onto the lesser, less accurate and not inflation proofed CPI by this Governments total incompetance. Making pension policy on the hoof is never a good idea and this shambles and disgraceful state of affairs shows this. see the following article: [URL="mhtml:{6EF71D81-FCE8-447B-947D-380BDD9A9C3B}mid://00000013/!x-usc:http://www.efinancialnews.com/story/2011-04-26/new-inflation-rules-create-pension-lottery"]http://www.efinancialnews.com/story/2011-04-26/new-inflation-rules-create-pension-lottery[/URL]

teacher_retired

I have just been informed by NASUWT that they too have launched a legal challenge to this change in the High Court on behal of the teaching profession. Obviously any favourable judgement would reflect elsewhere.