Inflation rate switch to hit pensions next year

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Millions of pensioners and benefit recipients yesterday witnessed the first results of Chancellor George Osborne's controversial decision to replace one inflation rate with another in the calculation of entitlements.

The apparently technical change from the Retail Price Index (RPI) to the Consumer Price Index (CPI) will, in a few years, see a retired public-sector employee on £10,000 a year lose almost £1,000. The Office for National Statistics said the annual CPI rate in September, the month usually chosen to prepare adjustments for the following April, and the first to be affected by Mr Osborne's change, was 3.1 per cent, against 4.6 per cent for the RPI, which includes housing costs and is usually higher than the CPI.

The new figures will affect payments from public-sector pensions, the state second pension and some private sector defined-benefit pensions. John Ball, head of UK pensions at Towers Watson, said: "Someone receiving £10,000 this year from a public-sector pension scheme can expect this to rise by £310 in April. Under the old rules, it would have been £460. If the forecasts used in the Budget prove correct, their annual income should be about £900 lower than it would have been by 2016."

However, the basic state pension is protected for now. The Coalition has pledged to raise it by at least 2.5 per cent, or by the rise in average earnings or RPI, whichever is higher, from next year. Since RPI is set to be highest, the basic payment will rise by about £4.49 a week from April to about £102.14 – the first time it has topped £100.

Both inflation measures were pushed higher by a further rise in food prices, reflecting global trends and poor harvests, as well as a sharp jump in clothing costs. Downward pressure derived from lower transport costs, including a big drop in air-ticket prices. Annual CPI was unchanged, while RPI slipped from 4.7 per cent in August.

Despite the high inflation, many other indicators suggest the economy is slowing markedly. The latest trade data showed the boost to the economy from a "rebalancing" towards exports is proving disappointing: the trade deficit narrowed to £4.6bn in August mainly because imports fell even faster than exports.

Meanwhile, the Nationwide's consumer confidence index fell by nine points to 53 last month, reversing a gain seen in August and the lowest level for more than a year. Reflecting that, the Council of Mortgage Lenders said loans to home movers fell 10 per cent to 33,200 in August. The spending review may further weaken sentiment.

Expectations that the Bank of England will resume "quantitative easing" next month are also growing. David Miles, a member of the rate-setting Monetary Policy Committee, argued yesterday that this was unlikely to be a normal recovery and, that if it were, then "the time for removal of some of the extraordinary monetary stimulus would already have come" – a mild hint towards more QE.