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Working Lunch Tuesday, 10 June, 2003, 15:21 GMT 16:21 UK
Singing from the same song sheet
The Chancellor's verdict on the euro is a "not yet", but on a new European way of measuring inflation, it's a very definite "yes please".

By the end of this year the Bank of England will be using the Harmonised Index of Consumer Prices - or Hicup - as its yardstick. Like the rest of Europe.

In so doing, our inflation rate will be cut at a stroke.

At the moment, by our current RPI measure, inflation stands at 3%.

Measuring by the HICUP puts it at 1.6%.

Impact

This raises many questions, not least what will it mean for our pensions?

As pensions payments are calculated according to inflation, will their value not fall?

Many of you are worried.

Roy Barton from Somerset says since pensions are index-linked to inflation, does that mean smaller increases are on the way?

And Brian Brookes wants to know how it will affect the state pension.

What about annuities, says Alan Catherall from Surrey.

Don't panic

Fear not.

The Chancellor was very specific on this issue and it should be good news for pensioners.

"The inflation target for the UK will be set on the consumer prices definition and I can confirm that pensions and benefits and index-linked gilts will be calculated on exactly the same basis as now," said the Chancellor in his statement to Parliament on Monday.

The reason for keeping the old measure, according to John Butler, chief economist with HSBC, is because it better reflects the real cost of living.

"RPI better reflects cost of living," says economist John
"The RPIX includes housing costs like house prices and council tax, and the Hicup doesn't. That's why the Chancellor will keep pensions and benefits indexed to it," he says.

"Most people would agree that housing for the UK in terms of confidence and expenditure is a lot more important."

Change inevitable

But of course, the dual system is not likely to continue in perpetuity. The Hicup system will invariably prevail.

And that will cause problems, according to John.

"If and when that change happens, it will be a very complicated move because in effect you will be introducing deflation in to the economy," he argues.

"The bigger problem will be how to sell this to pensioners and unions, and explain that their income is going to be capped at a 1% lower rate simply because of a geometric mean."

The new index will come into use after this Autumn's pre-Budget report.

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09 Jun 03 | Politics
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