Rishi Sunak’s Spending Review Gives Us A Blatant Indication That Inflation Is Coming
Today the Treasury confirmed, via the Chancellor in the Spending Review that Index Linked Gilts (lending money to the government with an RPI linked interest/coupon pay out) will have the RPI calculation adjusted to better match CPI measure of inflation after 2030. RPI is usually higher than CPI and by changing how RPI is calculated means that Index Linked Treasury Gilt holders will not likely not receive as much interest in the future with the change to how RPI will be calculated. The Chancellor suggested that he will withhold this until 2030 and after that the new RPI calculation will be used and no compensation will be paid to Index Linked Gilt holders for any lowering of returns.
What is the difference between RPI and CPI?
Retail Prices Index
RPI – includes costs of housing e.g. mortgage interest and council tax etc and is calculated as an arithmetic average i.e. costs of all goods/services added together and divided by the number of goods/services e.g. 50 goods/services below:
Consumer Prices Index
CPI – does not include costs of housing and is calculated as a geometric average i.e. costs of all goods/services multiplied together and divided by the root number of goods/services e.g. the nth root or in the case of e.g. 50 goods/services below, i.e. the 50th root of the multiplied value of goods/services:
What does the RPI calculation change tell us?
It tells us that the government expects inflation to rise over the next 10 years and it is already taking action to reduce its RPI linked coupon/interest liability/payments in 2030 with no compensation paid at the point of change. It will also impact pn any pensioner with RPI linked pension payments.
We have told you before and we will tell you again, the only way for governments worldwide to pay for global covid-19 borrowing is to devalue debt by allowing inflation to run at higher levels for at least the next 10 years. Over a 10 year period at 5% pa inflation, this is a compounded price inflation of nearly 63% and in turn it will devalue public sector debt by 63% without ever repaying it. The UK is already making its move to change RPI calculations to restrict is own debt interest payments in the future which, tells us it expects higher inflation as well as the US Federal Reserve having already said it will no longer use interest rates to control inflation for the “foreseeable future”. The US is also planning for inflation.
Expect higher inflation, expect price rises, expect stock market rises, expect pay rises which in turn will drive property price increases and then interest rate increases. Invest for inflation protection today, contact us for advice on your pensions and investment portfolios.