The National Statistics office says Britain should keep its retail prices index as a measure of inflation because it has “significant value” for investors and pensioners but recommended creating a new index.
It had been expected that Jill Matheson, the National Statistician, would propose changes as to how the retail prices should be calculated.
A change would have had major implications for the £280bn index-linked government bond market which is linked to a wide variety of services and investments, from water bills and rail fares to pensions and even national debt.
However, after a two-year consultation, she announced this morning that the statistics office would develop a new inflation index known as RPIJ to address an issue with how clothing prices are measured in the RPI.The new index, which will start in March, will replace the Carli formula with Jevons.
The ONS said that while the current measure doesn’t meet international standards, there is value to users “in maintaining the continuity of the existing RPI’s long-term 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.”
Market analysts had expected the statistics office to prefer a calculation that will lower RPI by 0.9 percentage points, bringing it inline with how the consumer prices index (CPI (Other OTC: CPIC - news) ) is calculated.
Many private pensioners also have their annual increases linked to RPI, while returns for investors with index-linked bonds and savings certificates are likewise based on the index.
However, owners of government debt such as pension funds and insurers had expressed outrage about the possible reforms, warning that they would bring the government bond market “into disrepute” and set back vital infrastructure projects £40bn of which are currently financed with RPI-linked corporate bonds.
The RPI review had also attracted controversy, as any change prompting a fall in the index would have provided a boost to Chancellor George Osborne and his debt-busting plans, saving the Treasury billions of pounds a year in interest on government bonds.
Although the recommendation was made independently, final approval sits with the Bank of England and ultimately the Chancellor.
Ros Altmann, director general of financial services company Saga, said the ONS decision as "brilliant".
"Consultation responses overwhelmingly favoured no change so would be hard to ignore," she tweeted.
"There's no right or wrong exact measure of inflation, each one has flaws."
The Treasury confirmed it would continue using the RPI measure for calculating the return on both old and new index-linked bonds.
"For gilt investors, future cash flows on existing index-linked gilts will continue to be calculated by reference to RPI," said the Economic Secretary, Sajid Javid.
"The government will continue to issue new index-linked gilts linked to the RPI."