This piece first appeared in the money section of the Saga website on 21 July 2010
The text here may not be identical to the published text

 

RIP RPI

It may be too late by the time you read this. But I am urgently reiterating the advice I gave on 28 April. Index-linked National Savings Certificates are the best deal in town. They are linked to the traditional Retail Prices Index (RPI) which has been the way we have measured inflation since 1947. But in my view it won’t be long before the index they are linked too is changed. Instead of giving you 1% above the RPI – which is currently 5% - the next issue of these certificates – I fear – will give you a percentage on top of the Consumer Prices Index (CPI) which is currently 3.2%. That will mean a big cut in your return.

These certificates are held for three or five years. Official forecasts for RPI and CPI over the next six Septembers show RPI being the higher by 1.4%, 0.8%, 1.1%, 1.2%, 1.4%, and 1.5%.

Throughout that period RPI is forecast to be between 3% and 4.2%. So certificates offering 1% on top of that tax-free give the most generous return on the market. And National Savings does not like to be that far out in front.

The CPI is lower than the RPI for a variety of reasons. Some vary from month to month – for example it omits most housing costs which are very volatile. But the main reason is the maths. If you put in the same data the formula used for the CPI will always produce a lower rate of inflation than the one used for the RPI. This month, for example, the maths alone accounts for almost half the difference between the two indices. While housing costs can go up and down the maths will stay the same. So in the long run CPI will always be lower.

There is one final reason why I am convinced it is last chance for RPI inflation-proofed savings. Until this month the Office for National Statistics produced a handy table setting out RPI and CPI month by month. RPI has now been banished from that table. You have to rummage around for it in a section called ‘Other measures of inflation’. This final demotion leads me to say hitch your three and five year savings wagon to RPI + 1% while you still can. Even if it is not changed it is still the best deal in town.

 


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