Following a three-month consultation, the Office For National Statistics (ONS) has decided to leave the calculation of the retail price index (RPI) unchanged but will create a new index that “meets international standards” to run alongside it.
The new index will use the same formula as the Consumer Price Index (CPI) to calculate average prices and will be published alongside the RPI measure from March onwards.
The way RPI is calculated, using the arithmetic formula known as the “Carli” formula, means that it is around 1 per cent higher than the CPI. As a result of this method of calculation the RPI tends to overstate the pace at which the cost of living is rising.
If it had been decided to alter the current RPI index so that it rose more slowly, it would have reduced the future pension increases of millions of private sector pensioners and cut the income of investors in index-linked government bonds and savers with index-linked savings certificates.
However, as it is, the current RPI calculation will be maintained for those in defined benefit pension schemes linked to RPI, who could otherwise have seen their incomes fall by up to 1 per cent.
Employers sponsoring final salary schemes may not be as happy with the news, however as some were hoping that a re-calculation of RPI would lower their pension scheme liabilities.
It was also confirmed that the Treasury would continue using the RPI measure for calculating the return on both old and new index-linked bonds and that the Government will continue to issue new index-linked gilts linked to the RPI.