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The wrong type of inflation

Coalition puts the con back in consumer price index
Duncan Milligan, Wednesday, December 17th, 2014

One of Osborne’s first austerity measures was changing the inflation rate to save the government money. Pay is not going up faster than inflation.

Osborne says its a “major moment in the British recovery”. Wages are now – just – growing faster than inflation, by about half a per cent.

That’s what they claim.

For Osborne and Alexander it’s their ‘vote for me’ moment. But you have to read the small print to see how dodgy the claims are.

It is a major moment for political spin, not for workers who have faced years of below inflation pay rises. Even if the dodgy duo were right, at this rate it would take a decade for wages to get to the same value they were in 2010, in terms of what wages can buy.

But of course they choose what rate on inflation they want to compare wage rises with. This is the Consumer Price Index, which the latest figures show rose 1.3 per cent lower than wage rises of 1.8 per cent.

Of course, if you are in the public sector you’ll be lucky to get one per cent, so your fall in ‘real’ income is not in doubt. You still won’t be feeling George’s major moment and it’s more of the same in years to come.

There are lots of measures of inflation, the other widely used measure is the Retail Price Index. Its rate was always the gold standard on which pay claims were based on and which governed increases in certain benefits.

It is still the gold standard used for the basis for inflation-linked rises in rail fares, water gas and electricity bills. When Osborne claims he is pegging rises in these bills to inflation, he means the Retail Price Index.

That’s why we have to pinch ourselves when we see headlines about pegging back rail fare and utility bill increases to the inflation rate. And then seeing the actual rises look higher than we instinctively think they should be.

And when the Tory boys in the City have their gilts ‘index linked’, it is to the RPI measure of inflation, not the CPI measure. There is no chance of the City boys short-changing themselves or of rail fares and utility bill rises being linked to the lower CPI rate your pay rises are measured against.

It’s a tale of two inflation rates. One – the CPI – is almost always higher than the other – the RPI – and both are widely used. But the lower rate – the CPI – is what Osborne and Alexander’s pay rise claims are based on.

The RPI measure showed an increase of 2.3 per cent over the same period the CPI index showed 1.3 per cent. By one inflation measure (the one favoured by the dodgy duo) pay is rising faster than inflation.

But using the RPI rate, wage rises are still dropping in real value. There is no major moment in “the recovery”, the coalition hope we have all forgotten about the inflation rate switch.

Don’t get conned by the Consumer Price Index when it’s used to compare your pay rise against inflation. The City boys and the rail and utility companies certainly don’t, why should you?




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