‘Stealth attack’ fear for pensioners over inflation

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Changes to the way a key measure of inflation is calculated could be announced amid fears of a “stealth attack” on pensioners.

The Office for National Statistics (ONS) will today announce the results of a review of the Retail Prices Index (RPI) as it looks at ways to reduce the gap with the Consumer Prices Index (CPI) .

Any move to change RPI calculations would have far-reaching implications, with RPI linked to a wide variety of services and investments, including rail fares, pensions and national debt.

There are growing concerns, in particular for pensioners, as many annuities are linked to RPI and even a small percentage change could knock thousands of pounds off a 20-year retirement income.

The proposals are also attracting controversy as they could provide a boost to Chancellor George Osborne and his debt-busting plans, saving the Treasury billions of pounds a year in interest on government bonds.

Plans under review could see changes to the way prices are calculated for goods, which is different for CPI and RPI, leading to the so-called “formula effect gap”.

Traditionally RPI has been higher because it includes mortgage interest payments, but as borrowing rates have been slashed in recent years, the formula effect is now the biggest factor behind the gap, accounting for a 0.9 percentage point difference between CPI and RPI on average.

The decision will flatter national accounts by £35bn over the next 18 months.