State Pension Payments Could Suffer if Inflation is Wrong

Economists suggest that the way inflation and GDP growth is currently calculated is inaccurate - by as much as 0.5%. What will this mean for consumers?

Emma Wall 4 March, 2016 | 12:12PM
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Inflation official figures could be overinflated – inaccurate to the tune of 0.5 percentage points, according to leading economists. Research shows that current inflation of 0.3% could actually be overestimated, and the actual figure -0.2%, making the UK in a deflationary environment.

Conversely, economic growth as measured by GDP could be underestimated by 0.5% - meaning that the current figure of 0.5% growth in the final three months of 2015, and 2.2% for the year as a whole should be 1% and 2.7% respectively.

While many consumers may be disinterested in economic headlines, inflation has a real effect on households – and not just on their expenditure. Pensioners and those who are in receipt of State benefits have their income payments linked to the current rate of inflation, meaning that if inflation is actually in negative territory they will not get an annual uplift in payments.

Stats Failure to Keep Up With Technology

The findings were made by James Carrick, Legal & General Investment Management economist who said that growth and inflation statistics are becoming harder to measure, as a result of the positive effects of new digital services, discount stores and the sharing economy.

“Economists are good at measuring what we bought in the Seventies – but not so good at measuring what we bought yesterday,” he said. “Wages may be weak but households have been able to save more than the statistics suggest thanks to improvements technology has made on our lives. It may be that the squeezed middle we hear so much about are not actually that squeezed and it is the big corporates that are really feeling the hit from disruptive services such as Uber and AirBnB.”

Carrick suggested that while the price of technology has not fallen significantly what consumers get for that spend has significantly improved, and off-radar savings have also been made.

“Software and downloads are a lot less tangible, and more difficult to track than hardware purchases, but they make a significant impact on people’s lives and their spending power,” he said.

He cited cloud computing, e-tickets, video phone calls and the power of e-commerce as just some of the elements now impacting consumers lives and producing an unmeasured uplift to the economy – and bringing down inflation.

What is the Impact for Investors

While greater cost savings are positive for consumers, shareholders of the big incumbent companies will be negatively affected. Travel agents have been replaced by AirBnB, taxi services by Uber, Netflix is disrupting media companies revenues and book and music sellers have lost out to Amazon. Only one of those new generation companies mentioned is listed and able for investors to get a piece of the pie.

What Will Policy Makers Do?

Carrick’s report is a precursor to one by Deputy Governor for Monetary Policy Charlie Bean, who will announce his findings on the true measures of inflation and economic growth on the day of the Budget, March 16, 2016.

Carrick said that while he expected the report to influence current policy, things would not change immediately. “Bean is charged with changing the culture of the ONS, but he can’t fix it overnight,” he said.

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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