The UK government announced changes to the Retail Price Index (RPI) on 4 September 2019. In summary, RPI will not be abolished, but RPI will be changed to match CPIH on a date between 2025 and 2030 (with such date to be determined later).

CPIH is the Consumer Price Index including owner occupier’s housing costs. It is about 1% lower than RPI.

Many contracts in the United Kingdom contain amounts that are indexed to RPI. Those contracts tend to fall into two categories:

  • Contracts that do not adjust for changes to RPI (e.g., RPI indexed bonds issued by the United Kingdom). In those contracts, RPI is likely to be lower than previously forecast.
  • Contracts that have clauses that allow for adjustments to RPI, if the UK government’s calculation of RPI changes. Those clauses tend to operate so that the parties are left in the same economic position notwithstanding a different calculation of RPI by the UK government. However, the adjustment clauses have two basic problems: (1) they will require the parties to replicate the calculation of the “old RPI,” when the parties will not have statistical information to so do; and (2) there is considerable scope for different calculations of the “old RPI” within the same deal (especially where one set of contracts is intended to hedge RPI in another set of contracts).

Some companies will want to adopt a “wait and see” approach. However, the announcement has an immediate effect on many things, including:

  • Valuations of shares in companies and funds with RPI-linked revenue (e.g., infrastructure companies and funds)
  • Net present value (NPV) calculations of future RPI-linked income
  • RPI swaps
  • RPI bonds
  • Stabilisation and expropriation clauses in contracts with the UK government

Many in the finance industry have been focusing on the consequences of the planned changes to LIBOR, but they will now also need to consider the consequences of the planned changes to RPI.