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Sunday, 4 January 2015

DEFLATING INFLATION

Rail fares frozen in real terms. That was the boast of the Chancellor George Osborne in September announcing that the rise in regulated rail fares such as season tickets and day returns would be no more than inflation in 2015. He used the Sun on Sunday for this announcement telling the paper 

"I can announce that no regulated rail fares will rise by more than inflation in 2015, which together with last year's freeze will save season ticket holders around £75 over 2014 and 2015."

In the past governments have allowed rail fares to rise by a percentage point or two above inflation. Hence George’s boast that in real terms they would be frozen as they were in 2014 and passengers would save money compared with what they would have spent.

The result is that on 2 January 2015 regulated rail fares in England rose by 2.5% - the rate of inflation measured by the Retail Prices Index in July 2014. Similar rises in some fares will be allowed in Scotland and Wales too, though they are frozen in Northern Ireland.

But hang on a minute, the Retail Prices Index was scrapped as an official measure of inflation by the UK Statistics Authority in March 2013 because it did not conform to international standards. And much of the Government has replaced RPI with the Consumer Prices Index or CPI which is generally almost one percentage point less. The latest figures, for example, show RPI at an annual rate of 2.0% but CPI at 1.0%. And in July last year 
  the month used to fix rail fares – RPI was 2.5% but CPI was 1.6%. Using CPI would have saved passengers £19 million. CPI is compiled according to acceptable international standards. 

Analysis of the items which are linked to RPI shows it is still used to index link items where changing to CPI would cost the Government money. So duties on fuel, alcohol, and vehicles, as well as the interest on some student loan repayments, are linked to the higher RPI. The only items which remain with RPI and cost the Government money are index-linked bonds and gilts which rise each year in line with the RPI or a fixed amount above it. But it would be very difficult to change those as they have RPI written into the contract. 


Triple Lock picked
The areas where the lower CPI is used are the ones that save the Government money such as tax allowances and social security benefits. The state pension is another victim of the change to CPI. It is protected by what the Government calls the 'triple lock'. Each April it rises in line with earnings, prices, or 2.5% whichever is highest. The change is measured in the September before the April rise. Earnings have risen less than prices and prices have risen more than 2.5% so for the years 2011, 2012, 2013, and 2014 the basic state pension has risen in line with prices. And in the last three of those years the increase has been the CPI not the RPI. The result is that the basic state pension is now £1.05 a week - £54.60 a year - less than it would have been if RPI had been retained. From April 2015 the basic state pension will rise to £115.95 a week. If RPI had been the measure of prices rather than CPI the basic pension would be £117. 

ReviewSo why is the discredited RPI used by the Department of Transport to fix rail fare rises? When I asked the Department for Transport why rail fares were in the RPI list rather than the CPI list I was told the Department was waiting for a review by the UK Statistics Authority on the use of price indices across government. At least part of that is due out on 8 January. I wonder if it will include whether the Chancellor should claim rail fares would not rise by 'more than inflation' when in fact they have just risen by two and a half times the current rate of inflation as measured by an index which conforms to international standards.

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