Will changes to inflation affect your maintenance order?
Overshadowed by the serious events in 2020, one announcement that caught my eye in December was that the use of RPI will be scheduled to tail off by 2030 and to be increasingly replaced by the Consumer Prices Index (CPI) and CPIH (Consumer Prices Index including Housing Costs.
Although I imagine gilt-holders were probably more upset at the news, it made me a little sad. I’ll tell you why.
RPI – The Nations Shopping Basket
The Retail Prices Index (RPI) is the oldest measure of consumer prices in the UK and is used widely across the economy and in all manner of financial contracts. Traditionally used also as the points of reference for uprating maintenance paid over time.
RPI and its replacement indices (CPI or are based on comparisons of consumer prices. What is in the basket changes over the years as consumer tastes change. For example, half chocolate-coated biscuits were added to the CPI in 2017. How bourgeois.
How reliable is RPI?
Evidence suggests RPI is likely to overstate inflation.
When compared to other measures, the ONS found the RPI inflation rate is currently around 1% higher. I accept that may be more relevant to multi-million gilt holdings than annual spousal maintenance uprating but the point is, it isn’t right.
In 2013, the RPI lost its status as a National Statistic. I remember the day. I tinkered with using its replacement set of stats, but struggled to leave my first love.
The ONS position on the RPI is brutal in the way only stats-folk can be;
“Overall, RPI is a very poor measure of general inflation…and (we) discourage its use. There are other, better measures available and any use of RPI over these far superior alternatives should be closely scrutinised.”
See the report here;
Why did this rather dull news upset me, I see you crave to know?
It flooded me with happy memories of working in a camping shop after I left school. Every quarter, a bod from the Jobcentre (who then administered the scheme) phoned up to ask;
“What is the price of the Deluxe Red Adults Sleeping Bag”
My reply; “£13.99, same as last time”. *
For me then, this was exciting, helping the government machine crunch its numbers. Without me right there, taking a call away from making sure people trying on walking boots wore hygiene socks, the system would have crumbled. Or Dave would have answered the phone instead.
It’s also nicely historic with stats starting post-war and I don’t know, I just like old things. Time to embrace change.
(*The name of the sleeping bag has been changed to protect its identity but the price is correct).
CPI and CPIH
The Consumer Prices Index including housing costs (CPIH), measures movement in the price of goods and services as consumed by households. The items within this notional basket of goods are weighted according to their importance to total household spend.
The CPIH includes a measure of owner occupiers’ housing costs and council tax that are excluded from CPI. Both the CPIH and CPI baskets contain some items excluded from the RPI basket. Similarly, the RPI basket contains some items (for example, estate agent fees) that are excluded from the others.
The CPI importantly it does not include certain housing costs, which are significant expenses for many households. However, because it is also the UKs chief recognised index, it is a measure that is capable of being compared internationally.
The CPIH builds on the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs, along with Council Tax. CPIH is therefore a comprehensive measure of price change across the economy as a whole and has been the lead measure for consumer price inflation from March 2017. Work is ongoing on other Housing costs Indices as we speak.
What index should be used for my maintenance order?
The fairest and most correct index should be used.
The ONS do not like RPI but many old court orders will be bound up with its use for many years.
RPI tables will still be published beyond 2030 they say but it will have far less use in the economy and less and less reliability. Maintenance orders entered into now however should carefully consider the right rate to use.
If it is not the most accurate measure of inflation, it cannot be right to carry on using it. As a matter of practice look at the comparable indices as to which is most favourable to use and flit between them but if it's use will dwindle in the future, it makes sense to look at the options afforded by the other indices.