1. Why CPI is stealing your pension
A convenient untruth
Why CPI is stealing your pension

2. CPI - a huge issue
The Government has chosen to use CPI rather than RPI to increase all state pensions, state welfare payments and all pubic sector pensions
Many private sector scheme will also choose to use CPI if they can
It will affect the young even more than the old since the effect will continue relentlessly
Taken together this may affect 40% of the population very seriously

3. What’s the difference: CPI vs RPI
The Government says the main difference is CPI does not cover housing costs and Council Tax
They say it is thus more appropriate to pensioners
In fact that is NOT the main difference – there has been no rise in housing and Council tax in the last year yet the indexes are 1.2% different in Dec 2010.
Most of the difference is the way they are calculated – RPI uses arithmetic mean (AM) to average the price rises in the basket and CPI uses geometric mean (GM)
GM is always less for the same set of price rises – this is called “the formula effect”
The difference due to this formula effect has averaged about 0.75% over the last year.

4. Arithmetic Mean vs Geometric Mean
In arithmetic mean (AM) you add up the price changes in a month and divide by the number of items – it is what you would normall consider to be an average
In geometric mean (GM) you multiply the price changes together and take the nth root
GM is normally used where several change are accumulated e.g. a business grows by 2% year 1, 3% year 2 and 4% year 3. The average growth is not (2+3+4)/3 = 3 it is cube root (2X3X4) = 2.88
But price rises across a month are not like this so GM is the wrong average to use

5. “Justification” for using GM
Statisticians say RPI overeggs inflation because it doesn’t take account of substitution
Substitution is the idea that people shift to cheaper goods and cheaper shops as prices rise
Example iceberg lettuce price stays the same and romaine price doubles. Consumers shift rorm romaine to iceberg
GM would apply (apparently) if the amount they now spend on each is equal
This argument is weak because
Iceberg not as good as romaine so quality not like for lik
Consumers unlikely to make the right calculations
Index basket is periodically adjusted which would include substitution so this is double counting
GM does not actually measure substitution at all – it is just being used as an estimate because it is just lower than AM
Basically the use of GM is a statistical fix

6. Why does index discrepancy vary
The Royal Statistical Society has estimate that the calculation method accounted for between 0.43% and 0.83% of the CPI/RPI difference last year i.e. most of it
The difference in the methods rises when the range in the individual price rises of items in the basket is greater. Some simple examples:
Item rises 2%, 3%, 4% AM=3 GM= 2.88
1%, 3%, 5% AM =3 GM=2.47
1.5%,3%,4.5% AM=3 GM=2.73

7. Inconsistency
Although CPI will be used for pensioners and welfare payments it is not being used for many other things such as
The fuel accelerator tax
Index-linked gilts
The electricity feed-in tariff
The government therefore knows this is not a good measure of inflation but chooses conveniently to ignore it
All EU governments have CPI, originally designed as a comparison measure, but all the others use an RPI like measure for pension increases

8. CPI was never meant to be real index
CPI started life as an invention of the EU to enable comparison between EU economies
It was originally called the Harmonised Consumer Index of Prices (HCIP)
It excluded housing costs because these were often out of synch and excluded Council Tax because many other country lacked such a tax
Why Geometric Mean was chosen is not clear other than the questionable substitution theory
No other European country uses CPI to index pensions – they use RPI equivalents
This is clearly opportunistic thievery by the government

9. The Disastrous Cumulative effect
Over 10 years 7-10% of pension lost
Over 20 year % of pension lost
Person now aged 20 – 30-40% lost by retirement
In the long term represents a huge reduction in pensions – the 20 year old will have an average salary pension so his pension will be 30% of current pensions
Future pensioner poverty
Burden on welfare - which will also be reduced
This is much bigger issue for the young than university tuition fees – it’s a double whammy for the young

10. Triple Lock
Government may argue triple lock on pensions – greater of CPI, wages, 2.5%
For the forseeable future wages will lag CPI (and certainly RPI)
There is no triple lock for pubic sector and private sector pensions affected – they will relentlessly fall behind inflation and wages

11. Just like the banks
Banks made money out of sub-prime mortgages by making the system so complicated it fooled people
If you make it complicated you can get away with murder – or at least theft
The Government is doing the same thing

12. The media
Have ignored this issue – probably because journalists cannot count
BBC in particular have accepted the governments ruse and now only refer to CPI “the government’s preferred measure” –rarely even mention RPI
Like sub-prime mortgages it is amazingly easy, with our media, to perpetrate such a fraud

13. Royal Statistical Society and UKSA
The RSS has written to UK Statistics Authority (ONS) to complain that CPI should include housing costs and Council Tax and that the calculation method is producing to great a discrepancy
Here is a good article on the topic
vs-cpi-seconds-out-round-two
Here is the RSS letterhttp:// %20RPI%20CPI.pdf

14. CPI +
UK Statistics Authority working through Consumer Prices Advisory Committee (CPAC) to include housing costs and Council Tax
If they do this it will be embarrassing because will become obvious that the difference is the calculation method
It will be obvious that the government has been lying or ignorant – take your pick