Inflation: steady but controversial

Inflation rates hold firm, but the government is catching flak for switching its indexes. And that's before it's moved to Google's new one...

by MT Staff
Last Updated: 19 Aug 2013

Today’s official CPI figure shows the UK inflation rate remaining at 3.1% in September. Despite falling petrol prices and a decline in airfares, the rate was kept high by furniture prices, rising food bills, and clothing becoming more expensive as we move towards winter.

Inflation has proved a real bugbear for the Bank of England – it’s been up at 3.1% since July, and above the Bank’s 2% target for 10 months. And it doesn’t bode well for us punters either – especially as our pockets also have the 20% VAT rate to look forward to.

But that’s not the only source of disgruntlement here. There’s a long-term issue too. The government is today switching how it sets increases in benefits and pensions, moving to CPI as a benchmark from the consistently higher Retail Prices Index. The TUC described the move as ‘the most insidious cut’ in public spending. And given that today’s figures set the bar for next April, you can see their point: while CPI was at 3.1%, RPI was at 4.6% – that’s quite a chunk of cash for claimants to lose out on.

Indeed, KPMG says the move will save employers £100bn in final salary pensions over the next 40 years. Good for employers, not so hot for the pensioner. Towers Watson’s Mark Duke was quoted as saying that, should the gap with RPI stay at current levels, a pensioner currently receiving £10k a year would get a pension of £11.4k rather than £12.2k in 2016.

This is of course part of a reality we’re all going to have to get used to. Cuts are coming, and we can expect far more objectionable decisions as we struggle to claw back that lost cash. Still, in this case you can’t help feeling the word ‘insidious’ as being very well picked.

Speaking of insidious, Google has found another use for all that data it has on our shopping habits: to create its own inflation measure. The Google Price Index is limited to online activity, but boasts an up-to-speed measure of how much goods are going for – in contrast to CPI data, which is laboriously collected from shops and published several weeks afterwards.

Could the Google index one day prove an alternative to the traditional measures? Probably not. People online aren’t buying the same goods as in the real world – in the US, housing makes up 40% of CPI, but only 18% of the GPI. And while the GPI shows a ‘pretty good correlation’ with CPI for goods often sold on the web, like cameras and watches, it doesn’t work as well with things like car parts.

But for that reason the government may be keeping a close eye on how it develops: if the GPI wound up judging inflation to be that magical 2%, then you may soon find it dictating your pension pot.

 

 

 

 

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