Azad Zangana Europen Economist
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For professional investors and advisers only. This document is not suitable for retail clients.
After a three-month consultation, the Office for National Statistics (ONS) has decided not to change the way that the retail price index (RPI) is calculated. A change which would have brought it more into line with the slower-rising consumer prices index (CPI) had been widely anticipated. While a new additional index (RPIJ) will be created and will be more in line with CPI, the RPI will continue to be used as a measure for private sector pensions and index-linked bonds.
The ONS’s decision to keep the RPI methodology unchanged comes as a shock to investors. If the committee was purely focused on the statistical merits of the proposed changes, then there could have been no doubt that the RPI index methodology needs reform. This is apparent from the half-hearted apology from the ONS in its opening statement admitting to the substandard quality of the index.
The introduction of the new RPIJ index is designed to highlight the problem with the RPI index over time, and will probably eventually replace the RPI index as the key benchmark for compensating inflation-linked bond investors.
For now, HM Treasury has confirmed that it will not change the use of the RPI index for linkers, which has helped bring yields down on the 10-year inflation linked gilt by around 28 basis points this morning.
In terms of our forecast, we will now revise up our RPI forecast to take into account today’s announcement. Our forecast for 2013 RPI inflation is now 3% against our previous forecast of 2.5%, while our 2014 forecast is now 3.6%, versus our previous forecast of 2.6%.
Important Information:
For professional investors and advisers only. This document is not suitable for retail clients.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority.
Source: ETFWorld – Schroders
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