The retail prices index should not be brought in line with consumer prices index, AXA Investment Managers has argued, ahead of a decision by the Office for National Statistics later this week.
The National Statistician Jil Matheson will publish her recommendations on Thursday following a consultation on changing the way RPI is calculated, which could potentially remove the "formula effect" which has kept it 0.5-1% higher than its counterpart the consumer prices index for most of its history.
RPI is predominantly calculated using an arithmetic mean, while CPI uses a geometric mean.
AXA Investment Managers senior portfolio manager David Dyer (pictured) said the investment house would prefer no change because RPI is written into long-term financial contracts.
Dyer said: "AXA IM's response to the consultation was a preference for Option 1 (no change) on the basis that RPI is a very long-standing index and one that has been used by many parties in striking long-term financial contracts over the years. When drawing up these contracts, users have recognised the calculation methods used for the RPI as well as being aware of the differences between the RPI and CPI."
However, Dyer said he expects the National Statistician to take action.
He added: "Nevertheless, it does seem likely that a change to the RPI will be recommended, with Option 3 (removing for all items the Carli formula that has led to volatility in clothing prices) looking the most likely. This would result in the RPI and CPI becoming more similar, although some differences between them would remain."
He argued there will be market volatility even after the announcement on Thursday as the Bank of England will likely have to decide whether the change is fundamental and materially detrimental to holders of index-linked gilts.
If the bank decides the change is detrimental, Chancellor George Osborne would then have to sign it off.
Dyer added: "However once the whole situation has been finalised, it is expected that there will be demand for index-linked gilts at a time when UK inflation continues to stand above the government's targeted rate.
"Indeed a reduction in the differences between CPI and RPI will probably see demand from those pension schemes looking to match CPI with index-linked gilts that are linked to RPI."
For further analysis of the impact of a change to RPI, click here.
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