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Savings and pensions face cut in proposed inflation overhaul
Image © Tim Scrivener – Rex Features
Returns offered on certain savings and pensions face a sharp cut if proposed plans to reduce government's borrowing costs get the go-ahead.
The Office for National Statistics (ONS) will meet in early October to discuss the possibility of 'trimming' the Retail Prices Index (RPI) measure of inflation so that it is more closely aligned to the official Consumer Prices Index (CPI) measure.
In recent years, RPI has tended to run far higher, and any move to bridge that gap could save the government billions of pounds as it would reduce the cost of its debt interest repayments as they are.
However, many savers, pensioners and investors would face a stiff penalty as their returns are similarly linked to RPI.
What exactly is being proposed?
On 8 October, the Consumer Price Advisory Committee - a part of the ONS - will meet to discuss four possible outcomes for RPI, ranging from leaving it unchanged through to aligning it completely with CPI.
That consultation will close on 30 November and any recommendations for change will be announced in January.
RPI (2.9%) is currently 0.4% higher than CPI (2.5%) and the gap between them has been as wide as 1% in recent years, so there is scope for a significant reduction.
Why does that matter to you?
The RPI measure is used to calculate the annual increase for a number of private pensions and also the returns on index-linked gilts.
And it's not just pensioners and investors at risk: many savers flocked to inflation-linked savings products when RPI soared above 5% last year. In order to get the very best rates, many required that you lock your savings in for up to five years.
Not all bad news
What's interesting to note is that a cut in RPI could be good news for some, given that many annual price rises are hinged on RPI.
Consider commuters as an example. The government has announced an RPI-plus-3% hike for rail fares in 2014, so a lower RPI would mean smaller increases.
Of course, this is all just theoretical at the moment - the consultation will only begin next month and it'll be some time before we get a clear idea of what it will mean for all parties involved.
The four proposals in full
The options under consideration are as follows:
- No change - the reasons for the formula effect gap have been identified, explained and understood.
- Change one particular approach to averaging prices - which calculates the average of price relatives (the amount a price changes) over time for the same type of item where there is no information about precise expenditure - for a limited number of categories (for example, clothing), with options of the method to be used in its place. This would reduce but not remove the formula effect gap as some difference between the RPI and CPI formulation would remain.
- Change one particular approach to averaging prices - which calculates the average of price relatives over time for the same type of item where there is no information about precise expenditure - for all categories that use it, with options of the method to be used in its place. This would reduce the formula effect gap to a minimum, although some difference between the RPI and CPI formulation would remain.
- Change the RPI so that its formulae align fully with those used in the CPI - this would remove the formula effect gap between the RPI and CPI, though there would remain differences in estimates because of the different coverage, weights, products etc. used in each.
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This government are a load of theiving robbin barstewards and deserve nothing but contempt
from last year 2011 to 2012 this year the goveremnt has borrowed another 59billion pound putting us in more debt the borrowing has gone up from 49 billion last year wat ever next they say they want toreduce the borrowing and get this country back on it feets how the hell we gonna do that with a goverment like we have now
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