Inflation error leads to pay cuts

Submitted by Matthew on 23 March, 2011 - 10:08

Workers have suffered the equivalent of a pay cut of thousands of pounds due to statistical errors which miscalculated the rise in inflation.

The Bank of England admitted in February that the consumer prices index (CPI) should have been 0.3 percentage points higher than it was for every years between 1997 and 2009. The retail prices index (RPI) was even more seriously miscalculated; it should have risen by 0.6 percentage points.

The errors mean that if wages had risen in line with the actual rates of inflation, a worker earning £10,000 in 1997 should now be earning £15,000. Instead, the failure of wages to keep pace with actual inflation increases has meant that the same worker has lost roughly £7,000 in real terms in the 14 years since 1997. Inflation-linked pensions and some benefits will also have taken a hit. Pensions experts estimate that some final-salary pensions would have been 4% higher if the calculations had been correct.

Various sources, including the Department for Work and Pensions, are attributing the errors to “methodological improvements” in how the CPI and RPI are calculated, but even senior figures in the City are admitting that “wage earners have been fooled.”

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