Dear all, Would like to better understand the difference between earning inflation and retail price inflation. Also, what are the advantages and disadvantages of having these inflation respectively though I knew pension members prefer their pension to increase with retail price inflation since they are not earning salary anymore and this can ensure their purchasing power will be less likely be eroded. Thanks!!
Earnings inflation is the change over time in how much employees earn. Indices exist to track these changes, and the official statistic for this in the UK used to be the NAE (National Average Earnings) Index, but this was replaced by the AWE (Average Weekly Earnings) Index in 2010. Price inflation is the change over time in prices. The most common way to measure these are though an inflation index which tracks movements in the price of a representative basket of household goods. Again, in the UK the most common measure used to be RPI (Retail Prices Index) but this has fallen out of favour by government and has largely been replaced by CPI (Consumer Prices Index). The difference between the two is mainly that CPI does not include the cost of housing (mortgage/rent payments and council tax, for instance) and that CPI is a geometric mean whereas RPI is an arithmetic mean. When it comes to which index will be used in pensions, then you're right, it will depend on what an individual's situation is as to which index they prefer. Scheme rules will set out clearly which rates are used. If they have a deferred pension and so haven't reached retirement yet, they will probably want that pension to increase with earnings inflation ideally, since this better tracks the increase in their salary. If they are currently receiving a pension in payment, they will want this pension to retain its purchasing power, and so would like it to increase with price inflation.
