MARKET MOVER - BNP PARIBAS - Investment Services India

commodity prices, though the rise in sterling offsets
this effect to some extent.
The MPC will still have room for more QE
The bottom line is that the August BoE forecast for
consumer price inflation of 2.2% in the fourth quarter
of this year is looking a bit of a stretch. Our own
forecast is for the rate in Q4 to average 2.5%.
But because most of the reasons for the upside news
appear to be supply shock-driven price rises in
energy and food, rather than anything more broadly
based, this gives licence to the Monetary Policy
Committee to look through the firmer headline rate.
Average earnings growth remains at or below 2%,
according to the most recent data. And as unit labour
cost growth has been pushed up by falling GDP
alongside still rising employment, we would not expect
that productivity squeeze to last much longer. Indeed,
a big rise in GDP in Q3 should provide an opportunity
for some correction here. So, the underlying position
on domestically generated inflationary pressure from
the labour market is fairly benign.
This all means that on the current constellation of
data, the MPC is still likely to see room for more
quantitative easing at its November meeting, when
the current tranche of buying is completed.
A further downside risk to RPI
Alongside constrained consumer price pressures,
there are further downward risks to the retail price
index (RPI). This is, of course, the index to which
indexed-linked sovereign UK debt is anchored.
Most countries with index-linked debt link their bonds
to some version of a consumer price index. The UK
differs in that the RPI is, in effect, a fairly old, legacy
index that uses what might be called an antiquated
aggregation procedure in some parts of its
construction. The result is that UK RPI inflation,
which also includes a mortgage-based measure of
housing costs, has tended over a long run of data to
average 0.5pp higher than CPI inflation. And since
2010, that difference has been 0.9pp.
A methodological group within the Office for National
Statistics (ONS), the Consumer Prices Advisory
Committee (CPAC), is currently considering the case
for making methodological changes to RPI that will
move it closer in construction to the CPI. A statement
from the National Statistician, alongside the CPAC
3
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Chart 3: UK RPI vs. CPI Inflation (%)
0
1991 1994 1997 2000 2003 2006 2009 2012
Source: ONS, BNP Paribas
average 1991 onw ards
average 2002 onw ards
average 2010 onw ards
minutes released this week, revealed the intention to
put out to public consultation a range of options to
change the aggregation of the RPI. At their most
extreme, this would involve aggregating the RPI
using the same formulae as in the CPI. That could, in
effect, narrow the gap between CPI and RPI inflation
from the aggregation bias to more-or-less zero.
The attraction to the government of such a move is
obvious. Changing the basis on which RPI is
calculated and thereby lowering its rate could, in
principle, save the sovereign GBP 3bn or so a year
in interest costs. At a time of fiscal austerity, this is
nothing to be scoffed at. On the other hand,
changing the nature of the index used for indexlinked
gilts might risk upsetting a key investor
community upon which the government relies for
considerable funding.
Major methodological change cannot be ruled out
The consultation on the changes to RPI will conclude
in late November and we should know by January
how the ONS is going to proceed. Any final decision
to change the RPI index will rest with the Chancellor
of the Exchequer. It is possible that comprehensive
changes to the RPI could come in the February 2013
inflation data, published in March. The timetable
between a decision to go ahead with a change and
publication looks exceptionally tight, however, and a
delay until March 2014 may be possible. But
contingent on the consultation, the ONS and CPAC
appear keen to press ahead with significant changes
to the RPI.
David Tinsley 20 September 2012
Market Mover
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