UK Basket Of Goods

The Retail Price Index (which is a method of calculating inflation in the UK) uses a "basket of goods" approach. Things which are being purchased more frequently are included and things that have gone out of fashion are removed. The price is compared year on year (so Feb 2008 with Feb 2007 etc). And the changes in the cost of the goods is considered to be the retail price inflation.

The BBC has a story about the latest changes. Notable inclusions this time are USB memory sticks, muffins and smoothies. Going out are frozen vegetarian meals, stubby bottles of lager and 35mm film. The initial report from the Office of National Statistics is here.

All well and good.

But there is - as usual - a slight problem with this method. First of all, the one used in the UK does not include mortgage repayments. So the RPI is actually a lot lower than real inflation. Secondly, as consumer electronic goods generally get cheaper over time, any comparison with them included also means that the overall inflation rate is lower than it actually is. Thirdly, taking consumer electronic goods once more as an example, it gives a false impression of the true inflation rate for the elderly or the poor - just how many iPods a year do you think your Granny buys in comparison to food and heating bills - as the weighting is not adjusted by age of consumer.

In August 2006, Clerical Medical's report (available for download here) showed that in the previous 10 years, pensioner inflation was 34%. In the twelve months to August 2006, it was 3.9%. The Telegraph reported in December 2006 that the rate for pensioners had gone up to 9%.

As I blogged earlier this year, This Is Money were reporting in January that the true inflation rate for pensioners was running at 7%. Since January - as you may well have noticed - the cost of food, gas, electric and petrol have gone up rather a lot, so this rate is likely to be MUCH higher now.

If you are interested in knowing what your personal inflation rate is, the Office of National Statistics has a calculator here. Although whether you could use this as a basis for negotiating a payrise is doubtful, it is still worth a look.

There Is No Greater Shame

Next week, Channel 4 will broadcast "Heat or Eat" a Dispatches investigation into pensioners living in poverty in the UK. At the time of writing I can find no information about what is included in the programme. What I have discovered, however, has shocked me.

I know I rant a lot about politicians, privacy and the introduction of ID Cards, but the fact that almost one in four pensioners (and there are now more than 9m people over 65 living in the UK) are at risk of poverty (compared to a European average of 18% as of 2004) is utterly beyond the pale.

About 40% of men over 65 and women over 60 are living in, or dangerously close to, fuel poverty - when more than 10% of their weekly disposable-income is swallowed up by gas and electricity bills. In the twelve months up to Feb 2007, according to thisismoney.co.uk, "the state pension increased by just 2.7% (£2.20 a week), compared to gas bills which went up 38% on average"

A report this week, by the Newcastle Building Society, showed that this year pensioners will fare the worst of all consumers, facing 7% inflation overall. Last September's RPI figure, on which this year's state pension increase is based, was 3.9%. Pensioners suffer because typically their spending does not match the theoretical shopping basket of goods on which the RPI is based. Older people spend a third of their outgoings on food and fuel, both of which will cost significantly more in 2008.

The average council tax bill is expected to rise by 4% to £1,380 in April, making a total increase of more than 100% since Labour took office in 1997. Council tax and other housing costs are excluded from the Government's pensioner's price index, naturally.

In 2001, at an EU summit at Laeken there was a ratified proposal* that all member states should endeavour to attain a level of 40% of their median wages as their basic state pension by 2007 and thereafter work towards 60%. It should be noted that an income of 60% of the median wage is considered the poverty line by the EU.

The British Basic Pension is 18% of the National average wage. Including Pension Credits, it is still only 26% of the National average wage. Interestingly, only 2.7 million pensioners claimed Pension Credits in 2005.

The annual AON Consulting European pension survey confirmed in 2007 that the UK state pension is still the lowest in Europe. The report tries to explain why the UK has remained in last place: "It is a difference of philosophy and a different view of the role of the state. In most of Europe, it is believed that the state's obligation is to ensure that people have a reasonable standard of living, relative to what they had when they were working. In the UK, the role of the state is to ensure that people do not starve. If people want to have more than the basic level, they need to save for themselves."

A spokesman for the Department for Work and Pensions said the Aon report failed to reflect its plans to improve the state pension, such as restoring the link to earnings."By restoring the link to earnings and modernising the contributory principle, we will make the state pension much more generous and fairer to women and carers," he said to thisislondon.co.uk in 2007.

The charity Help the Aged said it was time for the Government to address the 'shocking levels of pensioner poverty' by bringing forward the introduction of the link between pensions and earnings, which is scheduled for 2012. "Our pensioner population should be entitled to retire with dignity and without the need to apply for means-tested benefits" the spokesman added. Amen to that, brother.

Tom McPhail, head of pensions research at the financial advisers Hargreaves Lansdown, partly blamed Gordon Brown for the collapse in defined benefit pensions. One of the (then) Chancellor's first moves when he came to power in 1997 was to scrap the dividend tax credit on pension funds, described by the Tories as one of the "great scandals of the last decade". And as the Tories know a great deal about scandals, you have to suspect they know what they're talking about when they said this.

Michael Portillo, himself a former Tory MP, has an excellent article on this last point here which details the scandal that Gordon Brown *should* be more definitely embroiled in.

There is no greater shame than a nation that does not look after the people that made that nation great.

* - From Help The Aged