How RPI became Britain's Club Class inflation rate

What, when it it really comes down to it, is RPI for?

The retail price index used to be Britain’s main index of inflation – the one used for most pay settlements, for determining the increases in benefits and pensions – the one targeted by the Bank of England (well, an interest-excluded version).

CPI vs RPI (Source: ONS)

These days the majority of major economic annual price adjustments are based not on RPI but its rather more representative (and typically lower) brother CPI. (I’ve written a blog looking at the differences here) There are still a few exceptions, namely:

  • Index-linked government bonds (gilts)
  • National Savings and Investments Index-linked savings certificates
  • Regulate charges e.g. rail, water and sewerage
  • Student loans
  • Reference rate for wage negotiations (pay setting) [but in practice, less and less]
  • Private sector pensions funds

More broadly, RPI is typically used as the reference rate by landlords when they want to increase their annual rent. CPI is increasingly used by businesses when deciding how much to increase their employees’ pay each year.

There’s a pattern you may have discerned here. Those who set prices try to use whichever rate will make them better-off. Rail and utility companies will be delighted about the ONS decision to leave the way it calculates RPI unchanged because it means they can charge customers more each year and claim the increase was merely in line with inflation. Pension groups can lobby hard against the switch because it will make their relatively well-off pensioners less well-off.

And because there’s such a level of complexity over which measure of inflation one should use, for the most part those with the understanding and negotiating talent get away with using the measure they most want. It’s a kind of economic loophole.

Meanwhile, households and taxpayers who don’t have a powerful lobby group behind them end up on the wrong end of the decision. They have to pay more in taxes to pay for those index-linked bond interest coupons. Students have to pay more in interest. Benefits recipients have to accept comparatively lower payments.

Even public sector pension recipients will soon have to see their pension payouts increase based on CPI rather than RPI.

So, to go back to the original question, what is the RPI really for? The simplest answer is that it’s a Business Class inflation rate used by well-funded lobby groups to justify over-charging customers and/or generating themselves a higher return. Meanwhile everyone else gets stuck with the Cattle Class price index, CPI – in the process getting lower pay settlements, lower benefits and smaller state pension payouts.

Happily there is a solution, which is switching all of the above to CPI, lock, stock and barrel. And with CPI soon to start including a measure of owner-occupied housing costs, the final vaguely-reasonable excuse not to will soon be off the table. In an age where companies are coming under scrutiny for the amount of tax they do or don’t pay, it’s time to remove this economic loophole as well.

PS I’m not trying to argue against the re-indexation of things like benefits and public sector pensions to get the cost of the Government down. What I can’t fathom is why there has to be one set of rules for one group of society and a different set for another.