Transport Secretary Chris Grayling has raised the prospect of the Government using a lower inflation measure to calculate rail fare increases, amid criticism from travellers over sky-high ticket prices.
Consumers are currently short-changed to the tune of billions of pounds a year because the Government “cooks the books” when it calculates changes to the state pension, student loan repayments and rail fares.
It does this by selective use of the formulas used to calculate such increases. Inflation is usually measured using one of two indices, the consumer prices index (CPI) and retail prices index (RPI).
Both reflect the monthly change in the cost of a “basket” of goods and services. But they differ, often by a percentage point, because they track the costs of different items and cover different parts of Britain’s population.
For instance, CPI does not take into account mortgage repayments.
For July 2018, the latest month for which data is available, the rise in the CPI was 2.5pc while RPI increased by 3.2pc.
Where it costs us more, they use RPI. Where it costs the state, they use CPI
The difference may seem small but it has allowed the Government to save billions by, for instance, raising state pensions using CPI, which is almost always lower (see graph, below), but increasing train fares, student loans and other costs in line with RPI. The Government argues that it uses one measure in preference to the other where it is “more appropriate” to do so.
More than a decade after the Bank of England itself switched from RPI to CPI for its official inflation target, ordinary people are still losing out.
Mr Grayling has now suggested that rail workers, whose salary increases are linked to RPI, should switch to the CPI. This would cut costs for train operating companies, which could be passed on to passengers.
However, RBC Capital Markets analyst Damian Brewer said this suggestion "looks more 'smokescreen' than policy shift" and said the Government would be required to renegotiate contracts with train firms in order to pass this saving on to commuters.
Martin Lewis, founder of MoneySavingExpert.com, said: “Where it costs us more, they use RPI. Where it costs the state, they use CPI. There is no logical justification, it does not make any sense whatsoever.
“It’s a very simple way of cooking the books.”
Commuters already have to deal with train delays and timetable chaos.
Train companies bear the blame, but it is the Government that sets a cap on fare increases. Since 2014 the Department for Transport has set the annual increase in “regulated” fares, which includes most season tickets, at RPI.
Each August, the July rate of the inflation index is used to set the percentage by which rail operators will raise fares the following January. As it is, fares will rise by up to 3.2pc in January 2019. By comparison, average wages are growing by just 2.4pc a year, according to official figures.
The Campaign for Better Transport, a consumer group, said a commuter from Brighton to London would have paid £222 less for their season ticket since 2011 if CPI had been used to set fare increases, rather than RPI.
The Government switched to using CPI for increasing benefits, including the state pension, and tax credits from April 2011. Public sector “final salary” schemes, such as the NHS and teachers’ plans, were also moved to CPI-based increases.
At the time, the Office for Budget Responsibility, the spending watchdog, said the Government would make a combined saving of about £250bn over the coming decades as a result of the change.
For the moment, the state pension is protected by the “triple lock”, meaning increases are the highest of CPI inflation, earnings growth or 2.5pc.
Since the introduction of the student loan system under Tony Blair’s Labour administration, graduates have grappled with an increasingly complex system.
There are now two different plans with different levels of fees, salary thresholds – and interest rates.
Those who started a university course before September 2012 are on “plan 1” and have paid the relatively low interest rates you’d expect in an era when Bank Rate has been at record lows; they currently pay 1.5pc.
More recent students, under “plan 2”, pay a far higher interest rate on their loans – up to RPI plus 3 percentage points (there is a sliding scale depending on earnings). The plan 2 rate is updated in September each year using RPI from the previous March.
In 2018-19 the interest rate charged is 6.1pc. A plan 2 student who pays tuition fees of £9,250 a year and has a £6,000-a-year maintenance loan would build up total debts of £54,230. If CPI were used instead of RPI it would shave repayments significantly.
Tobacco, cars and alcohol tax
Tax rates on “sin” goods are generally increased in line with the RPI.
So-called “indirect taxes”, including road tax, formally known as “vehicle excise duty”, alcohol and tobacco duty, air passenger duty and fuel duty, have all been increased in this way. Despite this, some taxes have been frozen by successive chancellors.
Fuel duty, for instance, has been held at 57.95p per litre since the March 2011 Budget. Alcohol duty was raised on wine, beers, spirits and cider by two percentage points above inflation between 2008 and 2012.
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