As price inflation heads for 11% this year, it’s becoming obvious that even index-linking costs you money. This is because of how, and how often, it is calculated.
The ‘triple lock’ promise made to State pensioners in 2010 said that increases would reflect the highest of three measures: 2.5%, the Consumer Price Index (CPI) or National Average Earnings (NAEI). If the State hadn’t suspended this arrangement for 2022 then pensioners would have got 8% to match the growth in NAEI; a bonanza that our cash-strapped country could ill afford.
But the next best measure, CPI, has left retirees out of pocket. The Government calculates it in September but does not apply increases until the following April; a lot can happen between those dates. State pensioners were given a 3.1% boost from this April, but the annual CPI figure up to March 2022 was 6.2%, exactly double that.
Yet even if inflation was fairly and accurately calculated once a year and pension increases applied immediately, pensioners would still lose out. This is because the adjustment comes at the end of the year, but doesn’t make up for all the price rises over that twelve month period.
For example, take a couple living on the full State Pension - about £1,600 per month between them. Say they are OK for the first month now that their allowance has been reset up-to-date with CPI.
But if inflation jumps 0.5% (simple, not compound) at the end of each month, then our couple’s costs increase by £8 in month 2, £16 during month 3, £24 in month 4 and so on. At the end of twelve months they have lost out cumulatively by £528.
If they need every penny of their State Pension at the start of the year, they will have to borrow as prices rise or, more realistically, they will manage with less and/or lower quality in the way of goods and services.
The following April, under this fantasy arrangement, inflation indexing sets them completely straight again with a 6% rise; but that £528 interim loss is never recouped. At this rate, in (say) 20 years of retirement, the total shortfall amounts to tens of thousands of pounds; and it’s easy to see that higher inflation means even bigger losses.
For those who are still working and have spare income, they face savings account interest rates currently much lower than RPI; and as the Bank of England increases motgage rates to tackle inflation, there will be even less spending cash to squirrel away.
Inflation is our enemy, and the Government can’t (or won’t) do enough to defend us from it.