Personal View: Osborne may want inflation to rise but pensioners suffer, and they vote The likelihood of inflation indices rising above their target range would certainly explain the Chancellor's recent call for the Retail Price Index to be overhauled. The Office for National Statistics was widely expected dutifully to comply, possibly combining the more established measure with the Consumer Price Index, a relative newcomer, favoured on the Continent. Estimates suggested confluence might save the Treasury £3.5bn. Alignment would also have reduced the cost of benefits payments and both state and corporate sector pension liabilities where future increases are hard wired to RPI. Happily, Jil Matheson, our chief statistician, preferred to maintain order. The ONS resisted. The uncertainty had created panic in the financial markets. Myriad index linked financial instruments would have had their value slashed. Sense prevailed. Of course RPI isn't really a measure of inflation. Carney prefers nominal gross domestic product targeting. The trouble with this is that the underlying GDP figures take a while to settle down and so two approximate measures are combined. Hitting the current inflation measure has proved hard enough. Like CPI, the RPI is just a measure of the rate of movement in the prices of a bundle of carefully chosen products. The last three years" dramatic reduction in the cost of housing has narrowed the gap to CPI, which excludes mortgage interest payments and other housing costs. Upward pressure on the indices is currently coming from energy and food prices but this is counterbalanced by the falling cost of airline travel, clothing, electrical goods and very low mortgage interest rates. For many in the economy, particularly the elderly, inflation is far higher than either index suggests. Pensioners spend on items which are increasing in price. A subset of the ONS data, the Pensioner Index tracks inflation at near three times the rate reported in the headlines. For a while now companies have been permitted to switch from RPI to CPI when calculating pension increases to reflect inflation. Where RPI is not written into the scheme rules, many finance directors have switched and consequently paid lower increases. The move has not been particularly controversial as the indices have recently been so close. In the first quarter of 2011 RPI and CPI were pretty much equivalent. Should predictions prove accurate, later this year housing costs will increase as nominal interest rates rise. Consequently the convergence we have seen through 2010 and 2011 will reverse. The Chancellor had perhaps hoped to avoid this by bringing the two measures together. The same position may now need to be achieved by more subtle means. A stealthy rebalancing of the components may now occur. Lessening the influence of housing costs while increasing the weighting of energy prices as shale gas production comes on stream would help. Such juggling would not be new. Bakelite was in the RPI basket long after plastics caused this commodity's price to plummet. Flat screen televisions and MP3 players don't make up much of anyone's weekly shop. Political pressure will dictate that RPI and CPI continue to under-report the rate of inflation. The Chancellor needs inflation to increase to accelerate recovery, but would prefer RPI and CPI to stay low so that accounting for the State pension costs does not erode the benefit of the debt burden diminishing. There is a catch though. Those on fixed incomes - in general, pensioners - suffer. This is important. Pensioners are increasingly influential. They account for perhaps a quarter of consumer expenditure and they vote. The Chancellor must hope that they don't spot that their pensions buy them less and less. So, the move by some employers from RPI to CPI can be regarded as pragmatic and inconsequential. Pragmatic because in the short term the burden of the long term liability to the pension scheme is lessened and so the ability to fund product development growth and dividends is enhanced. Inconsequential because the indices are likely to converge, and the real cost of indexation will decline whichever reference point is used. In reality the inflation-proofed benefit promised by a defined benefit pension scheme, while index-linked, is certainly not inflation-proofed and therefore not in any sense "defined." Those managing the nation's finances dictate this must be so - in the interest of the greater good. Mark Wood is chief executive of Employee Benefits at Jardine Lloyd Thompson