Inflation: pensioners are biggest victims of RPI/CPI double-dealing

Millions of rail commuters – not to mention their student offspring – are entitled to feel the Government is not playing fair with its double-dealing measurements of inflation. But pensioners are the biggest losers from the way the real value of money is falling.

Rail fares and student loans are uprated in line with the Retail Prices Index (RPI) which is consistently higher than the Consumer Prices Index (CPI), which is applied to things that cost the Government money – such as pensions.

If that sounds like a dry technicality, then beware that new calculations from Saga show that inflation has robbed many older people of nearly a fifth of the purchasing power of their pension since the credit crisis began.

How you measure the rate of inflation depends on what you put in your sample or shopping basket. Excluding mortgage costs and council tax helps keep CPI more than 10pc lower than RPI. The respective  annual rates of increase were announced by the Office for National Statistics today as 4.4pc and 5pc respectively.

But even the RPI does not adequately reflect the way pensioners’ cost of living is rising because they tend to spend more of their money on food and fuel – where commodity inflation makes double digit increases common – and less of their money on electronic goods where prices are falling.

Ros Altmann, director general of Saga said: “Since the credit crisis began four years ago, the effect of RPI has been to reduce the purchasing power of money by 13.9pc – which may surprise some people, as they tend not to notice the cumulative effect of inflation.

“But we calculate the cumulative effect of inflation over the same period on those aged between 65 and 74 has been 18.8pc. If you are living on a fixed annuity, that’s money you will never recover. They have lost nearly a fifth of their purchasing power in four years.”

The Bank of England’s policy of keeping base rates much lower than any measure of inflation has transferred wealth from savers to borrowers by eroding the value of savings and debts. The idea is to prevent higher insolvencies, unemployment and repossessions; all of vital importance to people of working age.

Taking these factors into account, while commuters and students may feel it is unfair that their rail fares and loans are linked to RPI, their standard of living is unlikely to have fallen as much as pensioners’.

Everybody is going to suffer in this financial crisis, according to no less an authority than the Governor of the Bank of England, but older people who must live off their savings and can do little to protect themselves are being hit hardest.