Inflation Error Sees Students and Commuters Out of Pocket


January 2019

Inflation Error Sees Students and Commuters Out of Pocket

The government has been criticised by the Lords Economics Affairs Committee, claiming an error in the way UK inflation is calculated is leaving students and commuters out of pocket.

According to the committee, a fundamental flaw in the Retail Price Index inflation measure means the public are being ‘short-changed by the government’. The error, which has increased the rate of RPI above the real rate of inflation, is unfairly penalising commuters and students.

RPI is used by the government to calculate funds it collects, including rail fares and student loan repayments, as well as duties on alcohol and tobacco. However, they use a different measure, the Consumer Prices Index, to calculate some of their outgoings. These include welfare payments, tax thresholds and state pensions. The CPI rate of inflation is currently at 2.1%, while the RPI rate of inflation is higher at 2.7%.

“When the government gives money to people it is generally opting to adjust payments for inflation using the Consumer Prices Index,” said Lord Forsyth, chairman of the Lords committee. “But when it takes money from people, it is generally opting to use the Retail Prices Index, which has been around one per cent higher than CPI in recent years. This is simply not fair.”

The news comes after rail fares once again increased at the start of this year by 3.1%. This was despite many commuters complaining of widespread delays and rail disruption throughout the country last year. The increases have caused some season ticket holders to see the price of their yearly passes go up by hundreds of pounds, and the inflation rate is higher than the 2.6% rise in average wages last year. The use of RPI has also added almost £16,000 to the cost of student loans, according to a 2018 report from the House of Commons library.

The UK Statistics Authority, which oversees the Office for National Statistics, has admitted the RPI error has created problems, but the Lords committee have claimed the ONS have yet to ask the Chancellor Phillip Hammond to correct the issue. A spokesperson for the ONS said: “We agree the RPI has significant shortcomings. We will therefore continue to work closely with our counterparts in Government and at the Bank of England and respond to the committee.”

While the RPI inflation measure was abandoned as a national statistic in 2013, it continued to be used to work out payments on certain pension schemes and bonds. The error is estimated to have benefitted holders of government bonds by a total of around £1 billion a year in interest.

“We recognize the flaws in the way RPI is measured and have made progress in moving away from using it,” said a spokesperson for the Treasury. “However, given the extensive use of RPI across the public and private sectors, further moves away from the measure are complex and potentially costly.”

Lord Forsyth said: “The UK Statistics Authority’s refusal to fix the problems it admits RPI has is untenable. By continuing to publish an index which it admits is flawed, is arguably in breach of its statutory duty to promote and safeguard official statistics. This is not just a technical debate. The authority’s error created winners and losers. For example, commuters and students pay more because rail fare increases and student loan interest rates are linked to RPI.”