TALKING POINT
Our views on topical issues
Mooted changes to ‘flawed’ inflation measure could hurt investors Dropping RPI inflation could have a negative effect for pensioners and investors
T
he Chancellor has refused to review a decision on whether to scrap the controversial Retail Prices Index (RPI) measure of inflation in the short-term, despite reputable statisticians saying it is a flawed measure of price increases. However, an indication that it will be reviewed from 2025 has sent shockwaves through the RPI inflation-linked UK Government debt market, causing the price of some longer-duration bonds to fall by 10%.
The Government’s reticence to abandon RPI is likely in part driven by the fact it has been used as a money-making machine in recent years.
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| SHARES | 12 September 2019
Investors were caught offguard and many were unaware of how changes to inflation measures would impact certain investment products. Switching away from RPI could see inflation-linked government bonds, also known as ‘linkers’, produce lower returns. WHAT IS THE DIFFERENCE BETWEEN RPI AND CPI? The RPI measure of inflation was introduced in 1947, but was usurped by the Consumer Prices Index (CPI) measure of inflation, introduced in 2003 and thought to be more reliable. The two differ in how they calculate inflation, with RPI typically running around one percentage point higher than CPI. More recently the CPIH measure was introduced, which charts inflation including housing costs. However, a number of parts of
our everyday life are still linked to RPI, from student loans to pensions and train fares. WHAT’S HAPPENED? The Bank of England, which produces the figure each month, has already said the RPI measure is not fit for purpose, with Governor Mark Carney saying it is ‘of no merit’ and should be scrapped. He’s not alone – the Office for National Statistics has branded the RPI measure of inflation as ‘flawed’ with ‘serious shortcomings’ and does not recommend it being used. More recently the UK Statistics Authority said that RPI should be scrapped and merged with the CPIH measure of inflation. However, Chancellor Sajid Javid has delayed making any decision, saying any change will be consulted on between 2025 and 2030 – effectively kicking the can down the road.