From the BBC (reposted from
Penthesalie's thread on Aimoo OuchToo):
http://www.bbc.co.uk/news/uk-politics-15572524 Unfortunately, the story is based on leaks. Although it's likely to be true, given how well it fits the Government's present course on welfare, there's an extreme shortage of information on what they're actually considering as an alternative.
The thing is, using an average inflation rate for the year - which I assume means using an average of monthly CPI figures over the 12 months to that September - wouldn't actually save any money in the long term. Neither would using a 6 month average to that September, nor would using the lowest monthly CPI figure from the previous 12 months.
Why? Simply because cherry-picking a low number this year leaves you with less potential for cherry-picking next year. None of the schemes I've seen suggested do more than smooth out some of the variability from year to year.
I just dumped the
entire historical CPI record (starting in 1988) from the
Office for National Statistics into a spreadsheet and calculated what £100 in September 1989 would be now using each method. There's a copy of the spreadsheet attached to this message, but be warned, it's quick and dirty. For this post, you want the worksheet named "Variations on CPI".
The results are as follows:
- £179.11 using the September CPI figure (the current method);
- £179.37 using an average of monthly CPI figures over the 12 months to that September; or
- £178.98 using an average of monthly CPI figures over the 6 months to that September; or
- £178.88 using the lowest monthly CPI figure from the 12 months to that September.
The difference is negligible (this is over two decades, remember) and there are even years when the cherry-picking methods produce higher increases!
That said, £100 last year would be:
- £105.22 using the September CPI figure (the current method);
- £104.15 using an average of monthly CPI figures over the 12 months to that September; or
- £104.55 using an average of monthly CPI figures over the 6 months to that September; or
- £103.13 using the lowest monthly CPI figure from the 12 months to that September.
In other words, it does work if the Government only wants a one-off saving to make themselves look good this year. Obviously, that still inflicts a one-off deduction on us, which would persist in real terms forever.
The only way I can see for the Government to save money in the long term with a plan like this is to move the goalposts every single year, or adopt a measure that doesn't actually take full account of inflation. In fact, one can argue that CPI already fails that test when compared with RPI, because CPI doesn't consider mortgage interest.
Anyone for FPI - Fantasy Price Index?