RPI to remain as measure of inflation

The Momentum UK Team 10 January 2013

The Office for National Statistics (ONS) have announced that the way in which the Retail Price Index is calculated will not be changed.

The decision follows a three-month consultation as to whether or not the RPI should be brought into line with the Consumer Price Index, the other official index used to measure inflation. The consultation was initiated as a result of concerns over the accuracy of the calculation involved in the RPI.

Inflation is a measure of the rising cost of good and services across time. The RPI and the CPI are both calculated in slightly different ways, with the RPI will take into account the cost of housing, something that the CPI does not do.

The announcement may come as good news for some pensioners, savers and investors who are engaged with or about to engage with products or are that are tied to the RPI which is typically higher than the CPI.

Paul Sweeting, European head of Strategy at J.P. Morgan Asset Management said:

"This is good news for any pension scheme members whose benefits are still indexed against RPI. It is also good news for investors with existing index-linked gilts, as any change could have adversely affected the value of these investments.

"The lack of any change for index-linked gilts is understandable - changing the index for existing investors would have essentially changed the terms of the investments. Creating a new non-RPI index-linked gilt series to run alongside the existing RPI market would cause fragmentation and reduce liquidity. This could raise borrowing costs for the Government, so would be an unattractive option."

Annuity incomes would have also been impacted by any scrapping of the RPI or any change in the way it is calculated, as annuity providers are often heavily invested in government bonds which in turn use the RPI as a benchmark.

LV='s Head of Pensions, Ray Chinn comments

"The ONS' decision not to change how the RPI is calculated will be a welcome reprieve for many pensioners. This would have been detrimental to pensioners' buying power and quality of life in retirement.

“However, it is important to remember that the current basic state pension equates to less than the minimum wage. Given that it is generally accepted that the RPI for older people is higher than the headline rate, and we've seen pensioners living costs rise by 33% since 2000, it remains crucial that people continue to make additional private provisions for a comfortable retirement."

The ONS announced that in light of the consultation it would be introducing a new index to run alongside the RPI and CPI, known as the RPIJ to address the percieved flaws with the RPI.