Alongside the latest inflation figures released yesterday, the Office for National Statistics (ONS) announced a consultation on changing the way the Retail Prices Index (RPI) measure of inflation is calculated.
Without delving into the technical details (which this article in the FT explains), the differences between certain formulae used to calculate prices for the purposes of the Consumer Price index (CPI) - the government's preferred inflation measure - and RPI, mean a "formula effect gap" which is thought to over-inflate RPI by as much as 0.9% a year.
While there is a "do nothing" option on ONS's list of possible outcomes, it is highly likely that the ONS will take action that will either eliminate this gap altogether or minimise it, meaning that from 19 March 2013, the proposed implementation date, RPI inflation may be significantly lower than it would have been. Analysts are already cutting their 2013 forecasts.
As well as implications for private sector pensions, any change will affect pay awards influenced by RPI inflation.
Despite the fact that the current recession seems to have broken what was previously a strong link between headline inflation and pay awards (£) - at least until the economy recovers - assessing the cost of living will arguably remain a key part of the pay review process for many employers, particularly where they are negotiating with a trade union.
RPI has long been favoured by pay setters, partly because it has been around so long and partly because it is seen to be a more accurate reflection of the cost of living as it includes housing costs unlike the CPI.
Our 2011 pay prospects survey (£) found that more than half (54%) of 286 firms would use one or more measures of inflation in setting their next pay award. Of those, eight in ten (79%) said they would use the RPI measure compared with 55% who said they would take heed of CPI, the government's preferred measure.
If changes go ahead to the RPI measure of inflation next year, it may be that employers continue to take RPI into account but RPI-linked or influenced pay rises will be lower. Or it may be that RPI simply becomes less influencial as a measure when it comes to pay awards, with more employers looking at the CPI or a basket of measures.
Whatever happens, it seems likely that the affect of any change on pay awards in 2013 will be to push them down, not up.
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