Why the Retail Prices Index will change in 2030 and who it affects
From February 2030 the UK's oldest inflation measure will be calculated using the methods behind CPIH. The change is technical, but it will alter payments on pensions, gilts and student loans for years.
By Daily Oracles News Team3 min read
The Retail Prices Index has measured the cost of living in the UK since 1947. It is no longer the government's preferred measure of inflation, yet it is still written into contracts, pension rules and government bonds worth hundreds of billions of pounds. In 2030 the way it is calculated will change, and anyone with money tied to it will feel the difference.
Why statisticians lost faith in it
RPI lost its status as a National Statistic in 2013, after the Office for National Statistics concluded that its methods did not meet international standards. The main problem is technical. When RPI averages price changes within some categories of goods, it uses a formula that tends to produce a higher result than the methods used for the Consumer Prices Index. This gap, often called the formula effect, means RPI has generally run above CPI and CPIH.
CPIH is now the ONS's lead measure of inflation. It follows the same approach as CPI but adds the costs of owning and living in a home, which CPI leaves out. CPI remains the measure the Bank of England is asked to target.
What was decided
The UK Statistics Authority, which oversees the ONS, wanted to fix RPI by bringing the methods and data sources of CPIH into it. Because two specific index-linked gilts depend on RPI, the law required the Chancellor's consent for that kind of change before 2030.
In November 2020 the government and the Authority published their response to a consultation on the timing. The Chancellor said he could not consent to the change before the final one of those gilts matured in 2030. The Authority said the change could legally and practically be made in February 2030, and that is the plan. There was no compensation for holders of RPI-linked investments.
In practice, RPI will continue to be published under the same name, but from 2030 it will move in line with CPIH.
Who is affected
Index-linked gilts. The government sells bonds whose payments rise with RPI. Investors who hold them, including many pension funds, will receive smaller uplifts after 2030 than they would have under the old method. Markets have had years to price this in, but the change still reduces the real value of those holdings.
Defined benefit pensions. Many final salary and similar schemes increase pensions in payment, or deferred pensions, using RPI. Where scheme rules tie increases to RPI, members are likely to see lower rises once the index follows CPIH. Schemes that already use CPI are not affected in the same way.
Student loans. Interest on Plan 2 loans in England is based on RPI, set each September using the figure from the previous March. A lower RPI after 2030 would mean lower interest added to balances, all else being equal.
Contracts and leases. Some commercial leases, supply contracts and regulated prices still use RPI to set annual increases. Those that do will in effect switch to a lower measure without any renegotiation.
The cost of the switch
The direction of the change is clear even if the size is not. If RPI follows CPIH, payments linked to it will grow more slowly than they would have done. That is a gain for whoever pays the increases, such as the government on its gilts or employers funding pension schemes, and a loss for whoever receives them.
For individuals, the most useful step is to check which index applies to any pension, investment or contract that rises with inflation. Scheme booklets, loan statements and lease clauses normally name the index. Knowing whether it is RPI or CPI makes it possible to see whether 2030 will change anything.
