Widening Gap Between CPI & RPI

Written by Karen Bryan

£10 and £20 fan 240I thought it was a pretty dirty trick when the UK Government started to use the Consumer Prices Index (CPI) instead of the RPI (Retail Prices Index) as the main measure of UK inflation. It was immediately obvious that CPI was lower than RPI. Very convenient, as CPI was to appear in all the headlines and be used for the annual inflation uprating of benefits and state pensions.

I read that CPI doesn’t include housing cost, but as UK mortgage rates have been at a record low for years, I didn’t understand how this could explain the difference between CPI and RPI. Further research revealed CPI  uses a geometric mean rather than an arithmetical mean. Now that’s double Dutch to me, but it contributes to the difference between the two measures.

The gap between CPI and RPI is turning into more a gulf; figures released today reveal  CPI at 1.9%, a fall of 0.1% since last month, RPI at 2.8%, an increase of 0.1% since last month.

It’s affected us, as my husband’s occupational pension also changed from using RPI to CPI. Since he’s an early retiree, this will lead to a loss of thousands of pounds over the years. In my opinion, it was also a breach of contract, as he retired on the premise that his pension would rise by the rate of RPI every year.

Thank goodness that at present you can still buy an annuity (an income for life from your personal pension pot) which offers an annual inflation uprating based on RPI. I’m planning to cash in my pension pot in a couple of months and although insurance companies are factoring in the difference between CPI and RPI, I’d rather receive a lower initial pension which will increase annually by RPI.