No RPI alteration is good news for older people
Published on 10 January 2013 11:30 AM
Britain's top statistician has confirmed that a key measure of inflation associated with retirement income and a number of other investments and services will remain the same.
In a welcome boost for many older people, Jil Matheson confirmed on Thursday the RPI (Retail Prices Index) should continue as it is due to its 'significant value' to index-linked bond markets, despite its calculations falling short of international standards.
Ms Matheson has called for a new index to come into play from March, called RPIJ.
This would adopt an alternative way of calculating the cost of goods and bear closer resemblance to the national level of inflation, the CPI (Consumer Prices Index).
Some critics feared amendments to RPI calculations would have led to the index increasing at a slower rate, which would have impacted services and investments, ranging from water bills to pensions.
There were particular worries for older people, with even a small change to RPI potentially affecting a typical 20-year retirement income to the tune of thousands of pounds.
Many have their annual increases linked to the index, while returns for investors with index-linked bonds and savings certificates are also based on RPI.
Part of a bid to reduce the national debt
It had been suggested the RPI review was for the benefit of Chancellor George Osborne and his bid to reduce the national debt. Any drop in the index would have saved the Treasury billions of pounds annually in interest on government bonds.
RPI is 1.2 per cent higher than CPI on average per year. This is described as the 'formula effect' - a gap born out of the different methods applied to calculate the cost of goods for the indexes.
Mortgage interest payments have been the main reason behind the RPI being higher, but the formula effect is now the biggest factor as borrowing rates have dropped. It accounts for an average 0.9 per cent difference between CPI and RPI.
Ms Matheson mulled over four alternative plans in her RPI review, including one which would have removed the formula effect completely.
While the National Statistician's findings came as good news to older people, many experts admitted to being surprised by the absence of major changes.
Copyright Press Association 2013