Any costs from utility providers should be commercially justified – not index-based as an autopilot cash cow. It is time to stop arbitraging between indices and standardise these benchmarks.
Most broadband users at least base their price rises on CPI, but Virgin uses the usually higher RPI as do the providers of student loans – students are usually charged RPI plus up to 3 per cent, with a nod to prevailing market rates.
In January 2024 the interest rate is 7.6 per cent on some student loans. And the loan is not written off for 40 years. Almost usury in my opinion. A tax on knowledge.
Sir Ian Diamond, chief executive of the UK Statistics Authority and national statistician, told the FT a while back: “We have been clear for a number of years that the RPI is a very poor measure of inflation, at times greatly overestimating and at other times underestimating changes in consumer prices.”
So why is any contract allowed to be linked to RPI if it is so inaccurate? You can’t have it both ways.
From benefits to bonds
The government is also guilty when it comes to index selection, from benefits to bonds. People have invested in index-linked gilts or their pensions on the understanding that they would be up-rated by RPI. They entered those arrangements with knowledge of the difference between RPI and CPI.
Yet from 2030 up to 9mn defined benefits pensioners will be short-changed in their pensions, as the Office for National Statistics abandons the discredited RPI in favour of CPIH.
As the switch takes place, gilt holders – mostly institutional but anyone holding UK index-linked gilts – are likely to lose out without compensation, getting around 1 per cent compound less yield.
Pensioners will have their pension cut in real terms at a stroke. Over an average lifetime, the Pension Policy Institute has calculated that a male could lose 9 per cent on their overall DB pension, and women will have a larger lifetime reduction, as they live longer. That is equivalent to tens of thousands of pounds.
Drilling down on detail
Looking under the bonnet at the construction of the various indices, the RPI includes a measure of housing costs, whereas CPI excludes a number of measures, mainly relating to housing costs (for example council tax), and in particular to owner occupiers’ housing costs (including mortgage interest payments, house depreciation and buildings insurance).
Although CPIH covers owner occupiers’ housing costs, it does so on the basis of rent rather than mortgage interest – sadly, not reflecting everyday experience.
Despite the confusing collection of national indices, an ONS spokesperson told me: “We collect more than 180,000 prices across more than 700 different items to use in the calculation of our headline measures. We are confident that these aggregate measures are an accurate reflection of overall inflation in the economy.”
