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[uk_rpi] [index_linked_gilts_RPI]

Now that RPI is no longer an officially robust index, HMG have stated that it is intended to move away from RPI. In fact, it might have been easier and faster to repair RPI but that option seems to have been discarded. A consultation was launched on 11 March 2020, with responses accepted until 21 August 2020 (originally 22 April). Although HMG have spoken about moving to CPIH, that has only been built since January 1989, substantially shorter than CPI, which we have considered below.

The proposal appears to be to link future coupons and capital repayments to CPIH rather than to RPI. Effectively, that would be expropriation because CPIH tends to increase more slowly than RPI. As hoped for by many, HMG could have sought something practical and fair, such as replacing RPI by “CPIH + X”. If “X” is too low, we have expropriation. Should it be too high, that will be unfair for taxpayers.

On this website, we have previously been tracking the difference between RPI and CPI, which has been considered below. We consider it likely that using CPIH would produce figures of the same order as CPI. Over 1 year, and over 15 years, the difference has been pretty static at around 0.7% pa but we have also looked at the position were 0.9% pa to be adopted as appropriate.

As at 11 January 2020, we estimate that the issued capital was around 330 b (nominal) or 450 b (linked to date), with a total market value of 900 b. So far, no UK CPI-linked gilts have yet been issued. Broadly, if one were to use a constant mean differential between RPI and CPIH of 0.7% pa [0.9% pa] over 25 years, we estimate that the compensation required would be worth 170 b [224 b], equivalent to around two HS2s. Either figure is still far lower than permitting full early redemption.