The slow creep of inflation

Consumer price inflation, the rate at which the prices of goods and services bought by households rise and fall, is estimated using 3 price indices, Retail Price Index (RPI), Consumer Price Index (CPI) and CPIH (this is CPI including owner occupier’s housing costs).  CPIH has been adopted since 2017 over CPI as being the UK’s most comprehensive measure of inflation.  CPI is primarily still published to remain in line with European regulations.

Last month, The Treasury confirmed that CPIH would become the measure of choice with the ultimate change taking effect from 2030. However, in the meantime, there is a two-tiered approach with CPIH being deployed in some instances and RPI in others.

RPI was initially introduced in 1946 as a means of the government being able to have an adequate measure of changes in the cost of living. CPIH rates have been published since 2013 and is now considered to be a truer reflection of the change in the cost of living.  The difference between RPI and CPIH can typically be around 1% pa.

So, who are the likely winners and losers in the battle of the indices? Both student loans and the annual increase in rail fares, for example season tickets, will continue to be linked to RPI. Rail fares increases are linked to the RPI figure from the previous July, which this year was 1.6%, higher than CPIH of 1.1%. In recent years the difference has been closer to 1% which can make a considerable difference on a long-distance commute.

RPI will continue to be the measure of choice for inflation linked bonds already issued by the government. As well as pension funds which often hold billions of pounds of these bonds. Defined Benefit (DB) pension schemes which provide scheme members with a pension promise often linked to RPI, are likely to see future increases being less generous. Lifetime annuities linked to RPI are also likely to suffer a similar fate with a fall in annual increases.

A further consequence is that anyone in a DB pension scheme who is considering taking advice on transferring to a Defined Contribution plan could see the transfer value offered cut to reflect lower future increases (had they stayed in the scheme). Although of course, this in isolation would not be a robust enough reason to move away from a DB scheme e.g., giving up a pension promise with no member investment risk.

As with many issues, government dictates there is little that the average Joe / Jo can do to alter policy, other than lobby their local M.P. or vote in local and general elections. However, engaging with a financial adviser, having regular reviews, keeping abreast of legislative changes – tax allowances, being appraised of your personal financial position both immediate and longer term can prove to be very empowering.

If you would like to feel in more control of your finances or would like to see if you are in a position to stop working or reduce your hours, please contact us at Wingate.

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