The ONS has today published inflation figures for October. Consumer Prices Index (CPI) inflation was 0.9% for the month, while CPIH – which includes owner-occupier housing costs – was 1.2%.
This matters because earlier this month the ONS confirmed CPIH would become its preferred measure for inflation from March 2017.
The Government controversially switched from Retail Prices Index (RPI) to CPI inflation-linked increases for public and private sector defined benefit pensions in payment in April 2011. At the time, the Government said CPI “provides a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI”.
The move also saved billions of pounds because CPI has historically been around 0.7% lower than RPI.
Public sector pensions expenditure in 2016/17 is forecast to hit £40bn, according to the Office for Budget Responsibility (see note 1 below). Applying a CPIH inflation increase at 1.2%, rather than the lower 0.9% implied by October’s CPI figure, would cost the Exchequer an extra £120m.
AJ Bell senior analyst Tom Selby says:
“The move from RPI to CPI-linked inflation increases in 2011 was viewed by many as a stealth raid on people’s defined benefit pensions. Given the size of the numbers involved, even tiny tweaks in the inflation measure used can have significant implications for the cost of supporting those schemes in the long-term.
“However, I suspect there is little appetite in Government to increase the already hugely valuable pensions of public sector workers. Furthermore, if owner-occupier housing costs are dragged upwards, pegging pensions in payment to the ONS’ preferred CPIH inflation measure could see liabilities spiral higher still.
“The cost of paying public sector pensions is already a noose around the Government’s neck. It seems unlikely policymakers would voluntarily tighten that noose unless they absolutely had to.”
Notes
1. For forecast public sector pensions expenditure, see page 156, table 4.26 here: http://cdn.budgetresponsibility.org.uk/March2016EFO.pdf
2. The latest ONS inflation data, covering both CPI and CPIH, can be found here: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/oct2016#cpih