UK Markets closed

How the Government's inflation trick makes pensioners, commuters and students poorer

Sam Brodbeck
Train companies must raise

Consumers are being short-changed to the tune of billions of pounds a year because the Government “cooks the books” when it calculates increases in the state pension and in various costs such as student loan repayments and rail fares.

It does this by selective use of the formulas used to allow for inflation – something that matters more than ever now that prices are rising at their fastest pace for five years.

Inflation is usually measured using one of two indices, the consumer prices index (CPI) and retail prices index (RPI).

Both reflect the monthly change in the cost of a “basket” of goods and services. But they differ, often by a percentage point, because they track the costs of different items and cover different parts of Britain’s population.

For instance, CPI does not take into account mortgage repayments.

For September, the latest month for which data is available, the rise in the CPI was 3pc while RPI increased by 3.9pc.

There is no logical justification, it does not make any sense whatsoever. It’s a very simple way of cooking the books

Martin Lewis

The difference may seem small but it has allowed the Government to save billions by, for instance, raising state pensions using CPI, which is almost always lower (see graph, below), but increasing train fares, student loans and other costs in line with RPI. The Government argues that it uses one measure in preference to the other where it is “more appropriate” to do so.

Yet economists say successive governments have made changes cynically to save billions of pounds on the quiet.

This summer the Office for National Statistics, Britain’s independent data body, branded RPI “flawed”, the latest in a series of criticisms.

Its director general, Jonathan Athow, said the index would continue to be produced for “legacy uses” but warned that RPI had “serious shortcomings” and that the ONS “did not recommend its use”.

More than a decade after the Bank of England itself switched from RPI to CPI for its official inflation target, ordinary people are still losing out.

Martin Lewis, founder of MoneySavingExpert.com, said: “Where it costs us more, they use RPI. Where it costs the state, they use CPI. There is no logical justification, it does not make any sense whatsoever.

“It’s a very simple way of cooking the books.”

State pensions

The Coalition government switched to using CPI for increasing benefits, including the state pension, and tax credits from April 2011. Public sector “final salary” schemes, such as the NHS and teachers’ plans, were also moved to CPI-based increases.

At the time, the Office for Budget Responsibility, the spending watchdog, said the Government would make a combined saving of about £250bn over the coming decades as a result of the change.

For the moment, the state pension is protected by the “triple lock”, meaning increases are the highest of CPI inflation, earnings growth or 2.5pc.

Train fares

Commuters already have to deal with train delays and frequent strikes.

Train companies bear the blame, but it is the Government that sets a cap on fare increases. Since 2014 the Department for Transport has set the annual increase in “regulated” fares, which includes most season tickets, at RPI.

Each August, the July rate of the inflation index is used to set the percentage by which rail operators will raise fares the following January. Using CPI instead of RPI would have saved someone commuting from Brighton to London £228 over the past three years, according to the Campaign for Better Transport.

As it is, fares will rise by up to 3.6pc in January. By comparison, average wages are growing by just 2.1pc a year, according to official figures.

Student loans

Since the introduction of the student loan system under Tony Blair’s Labour administration, graduates have grappled with an increasingly complex system.

There are now two different plans with different levels of fees, salary thresholds – and interest rates.

Those who started a university course before September 2012 are on “plan 1” and have paid the relatively low interest rates you’d expect in an era when Bank Rate has been at record lows; they currently pay 1.25pc.

Student loans: five key myths debunked

More recent students, under “plan 2”, pay a far higher interest rate on their loans – up to RPI plus 3 percentage points (there is a sliding scale depending on earnings). The plan 2 rate is updated in September each year using RPI from the previous March.

In 2017-18 it was set at 6.1pc but because of rising prices – largely a result of the plunging value of the pound after the Brexit vote – next year it will rise to 6.4pc. A plan 2 student who pays tuition fees of £9,250 a year and has a £6,000-a-year maintenance loan would build up total debts of £54,230. If CPI were used instead of RPI it would shave £1,120 off that figure.

Across the entire student population, that amounts to more than £1.5bn. With a resurgent Labour Party promising to scrap tuition fees entirely, the Government is thought to be considering cutting interest rates for students as part of this month’s Budget statement.

Tobacco, cars and alcohol tax

Tax rates on “sin” goods are generally increased in line with the RPI.

So-called “indirect taxes”, including road tax, formally known as “vehicle excise duty”, alcohol and tobacco duty, air passenger duty and fuel duty, have all been increased in this way. Despite this, some taxes have been frozen by successive chancellors.

Fuel duty, for instance, has been held at 57.95p per litre since the March 2011 Budget. Alcohol duty was raised on wine, beers, spirits and cider by two percentage points above inflation between 2008 and 2012.

Stung by the Government's inflation fiddle? Let us know: sam.brodbeck@telegraph.co.uk