MNI PREVIEW: UK May Unveil RPI Inflation Measure Overhaul

By David Robinson

     LONDON (MNI) - UK authorities may announce an overhaul of the outdated

retail prices index Wednesday, in a move with broad implications for the

inflation-linked gilts market.

     Despite parliamentary turmoil, the UK Statistics Authority and Treasury

said they would respond to lawmakers' call for RPI reform at 06:30 GMT, before

markets open. The timing of the announcement, and the broad consensus among the

technical experts that RPI is not sustainable in its current form, suggest that

the authorities intend to take action and not just kick the can down the road.

     In January the House of Lords Economic Affairs Committee published a report

stating that the UK Statistics Authority may be breaching its statutory duties

by not correcting a well-known error in RPI and, despite getting officials to

work on the issue, former Treasury head Philip Hammond never delivered a

response. His successor, Sajid Javid, who took over in July, is now set to

respond to the report alongside the UKSA.

     Inflation-linked gilts are based solely on RPI, but in 2013 the then

National Statistician acknowledged that the measure was flawed, that it

overstated inflation compared to other measures and did not meet the standards

required for a national statistic.

     Despite that, the UK's index-linked gilt issuance has continued to be based

on RPI, delivering a windfall to debt holders, while student loan, train fares

and other items are also linked to RPI, boosting state revenues.

     One block to reform has been Treasury concerns over the potential cost of

reimbursing gilt holders if RPI is reformed. The Debt Management Office has

highlighted the depth and liquidity of the RPI linker market and officials have

noted the potential hit to investor confidence if the UK altered the inflation

measure.

     The Office for Budget Responsibility, however, knocked holes in the

argument that switching gilt issuance would be costly for the Treasury, stating

in a report published in July that interest payments on index-linked gilts in

the 2019-20 fiscal year alone would be stg3.1 billion lower if RPI were replaced

by a consumer price measure.

     Top OBR official, and former Bank of England Deputy governor, Charles Bean

told MNI in an interview that the risk that such a switch might undermine

confidence among investors in UK government debt may also be overstated.

     A possible response from Javid Wednesday may be to announce RPI reform and

to firm up plans to transition to a CPI measure which includes housing costs,

CPIH, as the government's headline measure. Javid could also announce plans for

CPI-linked issuance, although it would be a shock if he went as far as

announcing the sudden end of RPI linker issuance.

     "The Government have no plans to stop issuing index-linked gilts indexed to

RPI, as the demand for RPI-linked debt is vast in comparison to CPI," Lord

Young, speaking for the Treasury, said in the House of Lords debate on RPI

reform on July 1.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MC$$$$,MT$$$$,M$$FI$,MFB$$$,MGB$$$]