WHAT IS INFLATION AND HOW DOES IT AFFECT YOUR PENSION?
Inflation is the amount by which prices rise over time. The inflation rate gives us a snapshot of how much prices have risen over a 12-month period.
How is it measured?
Every month the Government announces the Retail Prices Index (RPI) - also known as the headline rate of inflation – which shows the percentage price rise over the past 12 months. This was set at 100 in January 1987. In March of 2010, it was 220.7. In March 2009 it was 211.3. This represents a rise of 4.4%. Until April 2010, the Retail Prices Index has been used to calculate increases in State pensions, public sector pensions, some State benefits and student loan rates.
In its June 2010 emergency Budget, the Coalition Government amended how public sector and state pensions would increase in future. From April 2011 they will increase in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).
How is the index calculated?
The Government takes a 'shopping basket' of more than 650 goods and services on which we typically spend our money - from bread and ready-made meals to a pint in the local pub – and comes out with an average price.
Why was the September 2010 inflation figure reported as 4.6% by some and 3.1% by others?
The 3.1% is the Consumer Prices Index (CPI) rather than the RPI. The main difference is that the CPI does not include any housing costs, such as the effect of mortgage rates or council tax.
Do prices always rise?
No. When the average cost of the shopping basket falls from year to year, it is known as deflation. Then the RPI is a minus figure. This happened last year when the rate bottomed at -1.4% in September.
If inflation was 4.4% in March, why hasn’t my pension gone up by that?
Because the increase to the LGPS pension in April 2010 was based on the RPI figure from September 2009, not the latest one. This actually showed a year-on year drop in prices of 1.4%, although the value of your deferred benefit wasn’t reduced by 1.4%.
So how is this likely to affect your deferred pension in future?
In short, we would need a crystal ball to predict future changes, although historically, RPI, which includes mortgage rates, has generally been, on average, about 0.75% higher than CPI. However, in September 2009, the RPI was measured at -1.4% whereas CPI was +1.1%, some 2.5 % higher.
| CPI (%) | RPI (%) | |
| 2000 | 1.0 | 3.3 |
| 2001 | 1.3 | 1.7 |
| 2002 | 1.0 | 1.7 |
| 2003 | 1.4 | 2.8 |
| 2004 | 1.1 | 3.1 |
| 2005 | 2.5 | 2.7 |
| 2006 | 2.4 | 3.6 |
| 2007 | 1.8 | 3.9 |
| 2008 | 5.2 | 5.0 |
| 2009 | 1.1 | -1.4 |
| 2010 | 3.1 | 4.6 |
