Change in inflation sums could save £3bn

Proposals from the Office for National Statistics on how to calculate the two types of inflation could save the government up to £3bn per year on the balance sheet.

by Michael Northcott
Last Updated: 19 Aug 2013

The ONS has revealed plans to consult on whether the consumer prices index (CPI) and retail prices index (RPI) should be calculated using the same method. Such a tweak would mean that transport costs, pension deficits and utilities bills would all fall, and create savings through the inflation-linked government bond market. Sounds excellent.

But will this accounting jiggery pokery mean anything for the average business or consumers? It’s hard to tell. On the face of it, bringing the two measures in line would reduce the RPI by 0.88%, and this would lower the cost of government borrowing by around £3bn in 2013, and more like £6bn in 2016. This would mean that the government’s budget deficit could be cut a little faster, which has to be a good thing. But in terms of the policy’s impact on the ground, there would be almost nothing to see.

Under the new system, RPI and CPI would still exist separately. What’s in question is the equation used to calculate RPI, which is not the same as the one used for CPI. This is an unusual quirk of the UK that is not quite in line with international statistical standards. 

A few particular groups would benefit massively – members of inflation-linked final salary pension schemes would inflate less quickly. It would mean that actual pensioners were slightly less well off, but it would also mean that deficits could be more quickly brought under control – something that many have struggled to do in recent years. The proposals come just a day after the ONS announced the CPI rate of inflation had fallen one basis point to 2.5% for August.  

Should the two measures be brought into line, it is unlikely that the wider economy would feel the effects day-to-day. But the taxpayer’s money saved could run into the tens of billions over the next 10 years: we doubt many people will take issue with that…

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