With RPI becoming an increasingly discredited measure of inflation, we look at some of the competing inflation indices and consider how the inflation debt market could evolve.
There are many stakeholders in the UK inflation debt market and with high demand, the UK Government can seemingly issue as many index-linked gilts as it wishes. Both pension schemes and insurers are key purchasers of index-linked gilts as they seek to match their liabilities as closely as possible, especially as the bulk of pension increases are linked to Retail Price Index (RPI) in some way or another.
There are many critics of RPI as a suitable measure of inflation, given the well-publicised flaws in the way it is calculated. This opens the door for a Consumer Price Index (CPI) debt market to get up and running - as CPI becomes increasingly important across many areas of the UK economy. In addition, pension increases linked to CPI have become more prevalent as some schemes seek to adopt CPI instead of RPI as a more appropriate measure of inflation.
But, with everyone talking about it and wanting a CPI market to emerge, who will actually unlock it? Corporates or Government? Add into the mix the emergence of CPIH (which includes owner-occupied housing costs) as another inflation index and the position becomes even more complicated. One thing is clear though, the status quo is unlikely to remain.
You can download our paper 'We need to talk about inflation' which looks at these themes more depth.
You can also contact Edward Laing, Actuary and Executive Consultant, for more information.