The method used to calculate the retail prices index (RPI) will remain unchanged, the Office for National Statistics (ONS) has said.
The announcement should quell pensioner fears of losing as much as £10,000 over the course of their retirement had the existing RPI formula been changed.
This is because private pensions are linked to RPI and the modifications to the way it is calculated that were being considered would have resulted in the index moving more slowly, in line with the consumer prices index (CPI).
Any such move would have also cut the income of investors with index-linked government bonds and savers with index-linked saving certificates.
However, after a three-month consultation, the ONS has decided to leave the RPI unchanged.
Missed opportunity
Philip Bray, a retirement and pensions specialist for Investment Sense, said: "It is widely recognised that pensioners suffer inflation at higher rates than either of the CPI or RPI figures. In many respects, today was a missed opportunity to introduce a measure of inflation specific to older people.
"Some good news for pensioners to start the day with, but the chances of it continuing with an interest rate rise to help increase savings rates? No chance."
RPI
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
Index-linked
This applies to an investment, such as certain types of gilts or National Savings & Investment (NS&I) certificates and pension income paid by some final salary pension schemes, whereby returns rise (or fall) in line with inflation as measured by the retail prices index (RPI), or the consumer prices index (CPI), or another measure of the cost of living.
Inflation
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
CPI
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
