RPI, inflation and index-linked pensions!

[n33712]

Hi

Are these statements correct:

1. If the price of petrol rises by 4% in a year, then the RPI must also rise by 4%.

2. If the rate of inflation is 1.2%, then an index-linked pension will rise by 1.2%.

Any help appreciated. Cheers!

[buildersmate]

Someone else with homework to do.
The first one is incorrect. I'll leave it to you to work out why.
The second one is right assuming the index-linking is to the rate of inflation (it might use another index).

[allblack12]

I'm not sure about the second question, but the first one no.

The RPI stands for Retail Price Index, and there are about 600 consumer or other goods that have their prices collected every month across the country by economists, and each item is weighted according to the proportion of one's (disposable) income is spent on the it. It is all averaged out, and the average increase in price is the RPI index rate of inflation, that means that on average all of the goods taken into account have become 4% more expensive.

Of course since it is just an average, the price increase of some goods may be considerably higher than others. So petrol may have risen by 20%, but the majority of the other goods may have stayed similar or even gone down, they are all averaged out and weighted and the index has been calculated at 4%, which effectively says that all goods have become 4% more expensive.

Hope that helps :D