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Inflation and Pensions – percentages, and how policy sometimes gets made.

October 14, 2009

I was set off on this train of thought by listening to the radio this morning. It was one of those quite rare occasions when even Radio 4 was able to annoy me with some sloppy wording.

The Consumer Prices Index (CPI), I heard, “rose by 1.1% last month”, and the RPI actually “fell by 1.4% last month”.

No they didn’t!!! If the  CPI rose by 1.1% last month, that’s a terrifying 13.2% annualised rate – as bad as when the IMF was bailing us out and the economy was falling to pieces – and we should all be heading for the lifeboats. Conversely if the RPI fell by 1.4% last month (the difference is mainly due to the effects of housing costs on the index) then that’s got the cost of living falling at an annual rate of 16.8%. Five or six years of that and everything would be free – hurrah!

What actually happened is that the CPI rose by 1.1% in the 12 months to September 2009. Similarly the RPI fell by 1.4% in the 12 months to September 2009.

Now – before you all condemn me as a pedantic curmudgeon with nothing better to do – this matters. It matters because we all have enough trouble with percentages and estimates and absolute values as it is, without somebody who’s job it is to make things clearer making it worse. We had exactly the same problem earlier in the year when car sales were being quoted… e.g. “sales of Vauxhall cars fell by 24% last month” and so on.

Once my mind was set on this track I was reminded of the 75p debacle surrounding the uprating of the UK State Retirement Pension in 2000. What caught the headlines was that pensions were “only going up by 75p” that year. Everyone, media included, focussed on the absolute figure – 75p – and all the measly things you could buy with it. How could Labour government be so mean to the elderly? But 75p was simply the result of applying that year’s RPI to the single state pension – a mechanism intended, by and large, to do no more than maintain the real value of pensions. Nobody argued about whether the correct percentage had been applied (it had) – and almost nobody argued about whether the right index was used. A separate agenda – about the value of state pensions overall – was pursued by attacking the absolute value of the result of the ‘keeping it level in real terms’ uprating.

And it worked!

With an election in the offing (2001) the government made a commitment to uprate  the State Retirement Pension every year in future by a minimum of 2.5% if the RPI was below this, and by the RPI itself if it was higher. That has been in play ever since.

I’m not debating, here. how much the State Pension should be, what it is for, how it should progress relative to average earnings, how it relates to income related top-ups for the least well off pensioners, how it should be funded, or any of that. But neither did many of the public or the media back in 2000.

The result is that next April, at a time when annual inflation could well still be negative, the State Retirement Pension will increase by a minimum of 2.5% – a real terms increase of possibly as much as 4% – at a time when drastic steps are being tabled to cut, let alone contain, public expenditure.

To bring this back to my quibble with a CPI which “rose by 1.1% last months”, I am not arguing the merits of the State Retirement Pension or its growing real value, I am pointing to the consequences of a policy which was set in response to an outcry about “75p”, which was able to get purchase because people couldn’t relate easily enough to annual percentage rates and to the notion of real terms value.. [So much so that I actually think that an increase of £0-0p in a year of zero inflation would have caused less controversy than the rise of 75p in 2000.]. So my plea is for journalists to keep everything as clear as they can (yeah right!) – and “give 75ps a chance.”

[Declaration of (dis)interest. During the 1990s I was a policy making Civil Servant in the DSS – the UK Department of Social Security and the precursor to today’s DWP. I dealt with the impact of benefits on living standards, work incentives and the distribution of income across different groups of people such as retired people, disabled people and families with children. If anyone is interested I can go on at length about the RPI and other indices such as the Rossi index, which is the RPI with changes in housing costs removed. I had first hand experience of how the perception of changes in benefits could affect policy, at the expense of debate of infinitely more complex and morally fundamental questions about equity, funding and often crucially about simplicity and efficiency of administration. HOWEVER – I was not a Civil Servant in 2000-2001, having already run away with the internet start-up circus.]

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