Inflation-linked bonds and utility companies were the big winners today as the Office for National Statistics shied away today from changing the way it calculates one of the indexes it uses to measure the cost of living.
A two-year consultation into changes to the Retail Prices Index concluded that the measurement was sub-standard but decided against altering the benchmark, which is used to set annual increases in a host of private-sector pension schemes. Rail fares increased by RPI plus 1% last week.
The RPI is higher than the Consumer Prices Index — an internationally accepted benchmark used by the Bank of England — because of the different way it is compiled. Changes to the so-called “formula effect” — widely expected by the market — would have lowered the index.
Britain’s water companies — whose ability to increase prices is linked to the RPI — gained ground with United Utilities and Pennon up 2% and Severn Trent gaining 1%.
The price of government bonds linked to RPI also surged today because markets anticipated the expected changes to lower returns as a result.
Derek Bird, head of the ONS’s prices division, said: “It is clear from the extensive range of uses based on RPI in its current formulation that continuity was important.” The ONS will instead introduce a new RPIJ index incorporating improvements which will have no practical impact. One economist said: “The ONS has admitted that the RPI is substandard but won’t change it. It looks like they’ve bottled it.”
