As a result of falling fuel and energy prices, the Consumer Prices Index (CPI) dropped to 0.5% in December down from 1% in November. This rate has not been equalled since May 2000, according to the Office of National Statistics. The Retail Prices Index (RPI), which is calculated differently, also fell to 1.6% down from 2% in November. By way of comparison, in 2008 prices were rising at an annual rate of about 5%. The UK Government’s target inflation rate is 2%.
While falling inflation can be seen as good for households as the cost of goods is not rising as quickly as in the past, it does impact UK defined benefit schemes. In the UK, defined benefit pensions (otherwise known as final salary pensions) increase each year by inflation. In 2011, the UK government introduced changes so that defined benefit schemes should rise in line with CPI rather than RPI. As CPI is typically lower than RPI, pension incomes will now rise at a slower pace. The change applied to all schemes, unless they specifically stated in their scheme rules that payments would continue to rise in line with RPI.