In January 2013 the Office of National Statistics (ONS) announced that, contrary to media speculation, publication of the retail prices index (RPI) will continue. From March 2013 the ONS will create an additional index (RPIJ).
That decision aimed to balance the acknowledged shortcomings of RPI against potentially adverse economic effects if the longest-established basis for indexation were wholly removed and replaced by an index likely to produce lower returns on gilts and bonds. That rationale is both clear and pragmatic in the context of long-term investment, but may produce concern rather than relief in the commercial property market.
What is the problem with RPI?
The ONS review was prompted by differences between RPI and the Consumer Prices Index (CPI). For example, CPI excludes, while RPI includes, owner-occupier housing costs. Crucially, the RPI uses arithmetic averages whereas the CPI generally uses the geometric mean, an approach that usually comes up with a lower figure when working out inflation. That difference is the 'formula effect'.