new inflation index given lukewarm welcome

The Office for National Statistics’ (ONS) plan to create a new inflation measure has been met with scepticism by asset allocators.

new inflation index given lukewarm welcome


However, the decision to maintain the way the retail prices index (RPI) is calculated and not align it with the consumer prices index (CPI) received wider support as this avoids a number of negative consequences.

After a three-month consultation, the ONS decided to create a new RPI-based index which uses the Jevons geometric formulation. The new index, known as RPIJ, will be published alongside the two existing inflation measures from March 2013.

Crispin Lace, director, consulting and advisory services at Russell Investments, commented: “You have to wonder about the value of publishing yet another inflation index.

“One of the main thrusts of the Kay Review is that 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.”

Pensions advice and investment firm Broadstone agreed that the launch of a third inflation measure is likely to cause “further headaches” by increasing the potential for confusion.

Broadstone actuarial director John Broome Saunders said: “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.”

The ONS’ consultation was designed to improve the calculation of RPI, which rises more slowly than the consumer prices index because of the ‘formula effect’.

However, the ONS surprised commentators by avoiding making changes to RPI calculation, which was one of the options on the table and would have led to an immediate fall in the measure.

Jil Matheson, the national statistician, said: “There is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.”

This element of the consultation was welcomed by fund managers. Had the ONS decided to bring the calculation of RPI into line with CPI, some of the negative consequences may have included lower coupons on future inflation-linked UK bonds and a reduction income for pensioners.

Ben Lord, co-manager of the £474 M&G UK Inflation-Linked Corporate Bond Fund , said: “All the lobbying that we – and some others – have been doing behind the scenes has been worth it.

“The 2062 index-linked gilt is up by 12 points in price terms and the whole linker market is rallying in the relief that no change is being made.”

Lace added: “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.

“[But] inevitably there will some disappointment too – those who were deferring any further inflation hedging until after the announcement may feel that they have missed out on an opportunity to hedge while linkers were ‘cheap’.”


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