Tuesday, October 17, 2006
RPI inflation at eight-year high
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Inflation measured by the consumer prices index dipped from 2.5% to 2.4%, on the back of lower petrol prices, offset by higher prices of household energy and a wide range of other goods. More worrying was the rise in RPI inflation to an eight-year high of 3.6%, just as negotiators are gearing up for this winter's pay round. Details here.

Comments

The rise in RPI information is entirely down to the monetary policy committee - increasing mortgage rates this year and the cut last year dropping out of the index. Other components in RPIX produced a fall.

The net effect of these actions by the MPC is to put real earnings into negative - using the monthly earnings index without city or other volatile bonuses which apply to a tiny proportion of the population. This is indeed worrying from a wage round point of view - most of which isn't negotiatirs these days but responds to recruitment and retention. If falling real earnings results in people seeking to move job to maintain their real income levels then non-union pay reviews will respond. Tomorrow's earnings index figures will give a clearer picture of whether we are in falling real earnings territory.

Posted by: paulbiv at October 17, 2006 10:53 AM

Excellent point, Paul Id just add that high company profits levels at present are also likely to swing employers towards playing safe and handing out good pay rises to retain front-line staff. (Of course there are also a lot of people in organisations that are taken for granted and they wont do so well).

Posted by: Sandid at October 17, 2006 12:20 PM

The FT have set another hare running about the impact of the RPI increase on benefits and pensions causing a large budget hole. Some benefits do go up by RPI, but most go up by linked indices - excluding housing costs, or, in the case of pensions, reweighted to spending patterns of lower income people and excluding housing. Rationale for excluding housing (and council tax) is that Housing Benefits cover housing costs and vary with rents (same for council tax benefit). RPI ex Housing has gone up by 2.9%, down from 3.2% last month, so treasury is probably heaving a huge sigh of relief rather than losing much sleep.

Posted by: paulbiv at October 17, 2006 05:26 PM
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