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More controversy on the way despite ONS leaving RPI unchanged

More controversy on the way despite ONS leaving RPI unchanged

Government bond holders let out a collective sigh of relief as it was announced there would be no change to the way the retail prices index (RPI) is calculated.

After months of consultation, the Office for National Statistics (ONS) decided not to narrow the gap between the RPI and the slower rising consumer prices index (CPI).

A new additional index of inflation will be created, running parallel to the existing RPI index.

Inevitably, there will some disappointment among investors who deferred their inflation hedging until after the ONS' decision. They will no doubt feel they missed out on the chance to hedge while linkers were 'cheap', argued Russell Investments' Crispin Lace, director at the consulting and advisory services firm.

But the number of investors cheering the decision will be far larger, with index-linked asset prices on the rise and future benefits preserved, as well as allaying fears the £280 billion government bond market could be brought into disrepute on the back of changes to the calculation.

Concerns have not totally disappeared, however, with experts shifting their attention to the creation of a new index.

'More generally, you have to wonder about the value of publishing yet another inflation index.  One of the main thrusts of the Kay Review is the tendency to favour disclosure of ever more information has created an incredibly noisy environment without any discernible benefit in terms of market efficiency. This morning’s announcement is perhaps another example of this,' Russell's Lace argued.

The new RPI index, called RPIJ, will effectively equalise RPI and CPI by modernising the existing RPI index and removing its arithmetic mean, replacing it with geometric mean.

M&G bond manager Ben Lord (pictured) said this implies more controversy further down the line.

'We could again see recommendations to move from RPI to RPIJ, but more likely, we will soon start to debate moving the index-linked corporate bond market from RPI linkage to CPI linkage,' Lord said. 

'The creation of RPIJ does seem a little irrelevant, where a new index has been created that few people will care about given that inflation linked bonds will continue to be linked to RPI and the government is clearly dedicated to linking other forms of government compensation to CPI,' he added.

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Ben Lord
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