The surprise decision by the Office for National Statistics (ONS) to keep the retail price index unchanged was met with enthusiasm from index-linked bond managers, which jumped on the news.
National statistician Jil Matheson acknowledged that the measure, which is estimated to overstate inflation by 1 per cent, does not meet international standards, and recommended a new measure be introduced.
But the RPI will still be used to calculate private sector pensions and inflation linked bonds.
Crispin Lace, director, consulting and advisory services at Russell Investments said many in the investment industry were relieved the index would remain unchanged.
“Many will be heaving a sigh of relief as they see index-linked assets price rises, or their future benefits preserved, following the surprise announcement this morning that the calculation of RPI will remain unchanged,” he said.
Inflation-linked gilts had lagged conventional gilts since the announcement of the RPI review, but the decision today sent index-linked gilts up by 3 or 4 per cent in some instances.
The move benefitted Stewart Cowley, manager of the Old Mutual Global Strategic Bond fund, who had 26 per cent of his fund in index-linked gilts.
On the Bond Vigilantes blog, £475m M&G inflation-linked corporate bond fund manager Ben Lord said that an attempt to make the consumer price index (CPI) more like RPI would have resulted in “severe and brutal change for the index-linked bond market,” which he believes could have resulted in a market fall of 70 basis points
But John Broome Saunders, actuarial director at Broadstone, said that the move overcomplicated the way the UK measures inflation.
“Inflation is a conceptually simple idea, and yet we now have at least three distinct ways of measuring it. This is the ugly face of flimsy compromise,” he said.
Statistical advice from experts to alter the RPI formula and bring it more in line with the slower rising consumer price index was rejected after a public consultation found many strongly objected to the change.
