Conning the nation with CPI and RPI (again)

TruePublica Editor. Here we go again – another tweak by the government to economic calculations designed to deceive us all. The government has just announced that it is to conduct a consultation to decide when it should “fix a flawed measure of inflation, the retail price index”, finance minister Sajid Javid said.

 

More than a quarter of British government bonds, worth around £450 billion (GBP), are linked to the Retail Prices Index (RPI) which runs higher than other measures of inflation. The most commonly used measure in Britain other than RPI is the consumer price index (CPI).

I’ll explain the difference between the two measurements in a moment – but what the government seeks to do here is just another con. And I do mean – it’s a con. In short, CPI calculations end up about 1 per cent lower than RPI each year. So the difference in government bond payouts is going to be at least £1billion a year less. So, investors get the same promise from the government but they get less back. And many of those investors will be pensions funds and investors looking for low-risk investments.

Also don’t forget that some price hikes are attached to RPI not CPI – like student loans, rail fares, both of which are effectively privatised and no longer government liabilities.

In a letter to the economic affairs committee, Javid said the consultation would last for six weeks from the budget on March 11 until April 22, rather than starting this month as previously planned.

“The government and (UK Statistics Authority) will respond to the consultation before the parliamentary summer recess,” Javid said in the letter dated Monday. Javid has said the RPI should be aligned with a different measure of inflation. This form of change will cause downward pressure on the price of index-linked gilts, which face being indexed to a lower measure of inflation.

One can only assume that with such a measure, the government really are scratching around for new forms of revenue either by increasing taxes or paying out less on their liabilities – this being the latter.

 

How it works

On the surface, the difference between the two is that RPI includes the costs of housing (mortgage interest costs and council tax for example) while CPI does not.

However, it isn’t that simple. If it was, we might have seen RPI fall below CPI as mortgage rates collapsed from 2008. But we didn’t.

Here’s where it gets a little more complicated. RPI is an arithmetic calculation – ie, the prices of everything to be included in it are simply added up and divided by the number of items. CPI is a geometric calculation. It is calculated by multiplying the prices of all the items together and then taking the nth root of them, where ‘n’ is the number of items involved.

The ONS website states that – “an advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services.” That may be so. But the real advantage to the government of using a geometric calculation is that it is always below or at the very worst equal to the arithmetic mean, which rarely happens.

The difference between the two is about 1 per cent per year between the two indices – give or take a bit.

So, if the CPI was calculated as the RPI currently is, it would be about 1% higher than it is.

The latest numbers from the ONS put RPI at 2.2 per cent and CPI at 1.5 per cent – a difference of 0.7 per cent.

And here is how the con works. This is why the government likes to link the payments it makes (liability payments like pensions and so on) to CPI and the payments it receives (revenue taxes and so on) to RPI. It pays out 1 per cent less, and/or receives 1 per cent more.

This is why we are all told that inflation is controlled at about 2 per cent per year and yet decade after decade households purchasing power has been consistently falling. And purchasing power is what it’s all about. If purchasing power falls – the cost of living increases – and we all know about that don’t we!

 

 

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