More drama from the Office of National Statistics (ONS) today, although
it’s possible you missed it. Avid followers of these things will know that
pension plans have, for the last couple of years, been in a sort of limbo as
regards the two leading (but crucially different) measures of inflation: Retail Price
Indexation (RPI) and Consumer Price Indexation (CPI).
Back in 2010, the government announced that it had had
enough of RPI generally, and preferred CPI. Because the government is the
government and can do what it likes, it also announced a wholesale switch from
linking pension payments to RPI, to linking pension payments to CPI. This was
pretty punchy stuff because RPI is usually higher than CPI and over the long
term, pensioners could reasonably expect their pensions to fall significantly. Many,
therefore, regarded the switch as nothing more than a cynical ploy by
the government to reduce its public sector pension liabilities. For its part, the govenment
protested that this view was harsh and unfair, maintaining that it was simply
concerned with consistency (it uses CPI for most inflation type calculations).
thought that was the end of it, it wasn’t. Last October, the National
Statistician announced a consultation into the
differences between RPI and CPI, noting that these different measures of
inflation were not helpful and probably not in line with international
standards. Further, it became clear, her conclusions would potentially lead to
the reduction or complete elimination of the differences between the two
measures, with RPI, in effect, being modified to become CPI. This harmonisation
of RPI with CPI was the National Statistician’s “Option 4”.
(of changing RPI into CPI) on the markets, on gilts and on pension benefits
(which are directly linked to inflation) would be significant.
line:
would be made and that RPI would
henceforth become CPI. Here’s what one leading investment bank had to say a
couple of days ago:
The ONS’s view is clear, the independent expert Diewert’s view is clear, and
there doesn’t appear to be any way to fudge the result by doing something other
than the maths differently.”
“priced in” The (Option 4) Change as though it had already happened. Or rather it
had priced in a lot of The (Option 4) Change, waiting until today for the full
announcement.
happened, all inflation linked instruments would get cheaper (due to RPI (which
is higher) morphing into CPI (which is lower)). Lower inflation means cheaper
index linked gilts and inflation swaps.
funds stood expectantly on the risk management side lines, waiting for the official announcement of The (Option 4) Change, so that they could buy cheaper index linked gilts and
inflation swaps following the switch.
Guess what? The (Option 4) Change didn’t happen after all.
consultation on options for improving the Retail Prices Index (RPI), the
National Statistician, Jil Matheson, has concluded that the formula used to
produce the RPI does not meet international standards and recommended that a
new index be published.”
it turns out, for just two short paragraphs later…
recommendations the National Statistician also noted that 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. Therefore,
while the arithmetic formulation would not be chosen were ONS constructing a new
price index, the National Statistician recommended that the formulae used at
the elementary aggregate level in the RPI should remain unchanged.”
show. Trying to second-guess the markets, the Regulator, the Office of National
Statistics, the Board of the UK Statistics Authority, the Bank of England, the
Chancellor of the Exchequer, the Consumer Prices Advisory Committee, the
Treasury, The Department of Work and Pensions, Jil or the Grand National, is a
mug’s game.
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