Shrinking Support: what Universal Credit indexation means for living standards

In Budget 2010, the Chancellor announced that the uprating of benefits, tax credits and public service pensions would, from April 2011, be made with reference to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) or Rossi Index.  Because CPI tends to give a lower measure of inflation than the other two indices,  the shift was projected to save the government £10.6 billion a year by 2015-16 (with this figure continuing to compound over time).

However, the government also justified the move by arguing that CPI provides “a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI” because of differences in both methodology and coverage.  In this note, we consider the merits of the case set out by the government, before turning in the next section to consider the distributional impact of the shift with specific reference to the forthcoming system of Universal Credit.