10 January 2012
The Office for National Statistics has announced the result of their review into the RPI calculation methodology. This product is used as a key reference index for UK index-linked securities and derivatives as well as being the reference for some benefit increases in defined benefit pensions entitlement.
The ONS have recommended that the calculation of the RPI remain unchanged : thus protecting the status of RPI-linked pensions and financial assets : whilst acknowledging the shortcomings in the methodology by adding the new RPIJ index based on geometric averaging (which is consistent with both the CPI and generally accepted practice across European).
Pensioners will therefore not see a fall in expected benefits and private sector DB liabilities will not correspondingly decline. We expect the price of UK inflation-linked products to firm up slightly over the next day or two as residual expectations of change are factored out. We would not expect any immediate effect on the liquidity and depth of the inflation markets, though there would be a small risk of partial market fragmentation should the RPIJ start to be adopted for calculation of inflation linking for new products.
Readers interested in a little more detail and historic backdrop should read our previous report.
The ONS announcement is available on their website