How to Use Inflation Statistics in Pay Setting

Traditionally, there has been a strong link between inflation statistics and pay setting and organisations have tried to offer pay increases that match or exceed increases in cost of living. Although many employers now link pay increases to performance, most employers still take inflation rates into consideration when carrying out annual pay reviews.

Each month the Office for National statistics publishes inflation statistics. Let Reward Connected explain the statistics available and how your organisation might use them.

What is inflation & why does it matter?

Essentially, inflation is a measure of how fast prices are going up or down in the economy. Inflation indices are indicators of how the economy is performing. Inflation can affect standards of living if wage growth is static or inflation out strips wage increases, as this reduces spending power.

What are the inflation measures?

Economists and government officials, including the Office for National Statistics (ONS) use a variety of methods to track inflation. They are used by the Government for setting economic policy, but also for the uprating of some benefits, pensions, rail fares and utility prices.

The most common measures are:

Consumer Price Inflation (CPI)

This is the rate at which the prices of goods and services bought by consumers rise and fall, and is estimated by using price indices. It can be thought of as a shopping basket containing all the goods and services typically bought by households. Movements in price indices represent the changing cost of this basket.

Consumer Price Index including owner occupier’s housing costs (CPIH)

This is a National Statistic and is ONS’ lead measure of inflation. It extends the Consumer Prices Index (CPI) to include a measure of the costs associated with owning, maintaining and living in one’s own home, along with Council Tax, as these are significant expenses for most households.

Retail Price Index (RPI)

The Retail Prices Index (RPI) is the longest-standing measure of inflation in the UK, but it is no longer a National Statistic because its methodology no longer meets international standards. Due to its long-standing use, ONS continue to publish the RPI.

They can all be found on the ONS website.

How to use Inflation statistics in pay setting

Due to its unpredictable nature, few employers implement pay awards that include an explicit link to current or future inflation. However, most take it into account in determining pay. But which measure should be used? RPI is a long-established indicator and the one with which both employees and employers are familiar. However, many employers now pay attention to CPI as well because RPI is no longer an ONS national statistic. The disadvantage of this is that it does not include owner-occupier housing costs, so may not be seen as capturing the cost of living as effectively as the RPI by employees. Consequently many employers choose to look at CIPH, which the ONS now uses as its headline measure.

Need more help?

Reward Connected is an independent reward consultancy and we can help you interpret what inflation statistics mean for your organistion. Contact us today to discover the range of support we can provide. We look forward to helping you.

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