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UK Lords call for change in gauge used for index-linked bonds

[LONDON] The UK government should immediately change the index it uses to issue inflation-linked bonds, a group of lawmakers said.

The intervention continues a long-running debate about the Retail Prices Index, which is still the basis for increases in rail fares and student loans despite being a largely discredited measure that no longer even has a quality mark from the statistics office.

The Lords' Economic Affairs Committee, which has been investigating whether RPI is an appropriate measure of inflation, suggested an interim switch to the Consumer Prices measure in all areas not governed by private contracts, including index-linked gilts. Furthermore, the UK's statistics body is at risk of breaching its statutory duty by not fixing problems in its calculation of RPI, the group said in a report Thursday.

The government should shift to a single measure of inflation and put an end to "index shopping," whereby it uses different gauges for varying purposes, they said. UK linkers slumped after the report was published, driving yields to the highest since November.

A move away from RPI-linked debt has been suggested before, but the Treasury said in 2013 it would continue to issue gilts based on the measure. It tends to be higher than the more widely used CPI, which benefits investors and pensioners whose payments are based on it. The BOE has previously estimated the wedge between RPI and CPI at about 70 basis points.

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"This is not just a technical debate," Committee Chair Michael Forsyth said. "The Authority's error created winners and losers. For example, commuters and students pay more because rail fare increases and student loan interest rates are linked to RPI."

The main problem in RPI arises from the collection of price quotes for clothing - with the example of women's "strappy tops" often cited. Fixing it requires approval by the Chancellor of the Exchequer because it would cause "material detriment" to linker holders by potentially lowering returns, the report found.


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