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Bye bye RPI

Last week Rishi Sunak delivered his eagerly anticipated spending review. We were not expecting good news and we did not get any. Amongst the headlines were that we will suffer our deepest recession since the Great Frost of 1709 and a public sector pay freeze for all non-health roles.

Hidden in amongst the detail was the confirmation that the widely used inflation reference index of RPI would be scrapped from 2030 and replaced by CPIH. This has been discussed previously and was potentially going to come in from 2025.

Definitions:

• RPI – Retail price index – this index tracks the cost of a fixed basket of goods over time but no housing input.
• CPIH – Consumer price index plus housing – this tracks a slightly different basket of goods but includes a housing element (living costs not house price movements). This measure is seen as more realistic to actual inflation nowadays.

Why does this matter?

Historically CPIH typically runs about 0.8% below RPI.

So what?

Well RPI is the reference rate used in calculating payments of approximately two thirds of final salary pension schemes, some annuity payments and the income and capital returns linked to the majority of older index linked gilts. It is estimated that the change in the measure could cost index inked gilt holders up to £96bn.

A lower rate means a lower payment for holders of the above securities. The government has stated that no compensation will be available to those impacted.

The relentless war on savers continues.

After a rough, tough performance month in the pan-European equity markets, the instinct is always to look away from the detailed data and conclude in a world of tightening pandemic restrictions and an imminent (and hotly contested) American presidential election, that uncertainty must induce investment caution.

Financial markets are always a three-dimensional jigsaw, with new pieces being added and deleted at whim every business day. But the signals from the last month have been especially difficult to discern. In contrast to the bounce back second quarter, July was a negative month for pan-European markets with the U.K. continuing to lag.

We maintain our belief in the ‘American Dream’ as described by James Truslow Adams, that “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement,” regardless of social class or circumstances of birth. We not only acknowledge but embrace that we have work to do as a society, and hope that this year will serve as an inflection point as we advance toward a stronger and more united world.

Over three hundred and fifty years ago, back in 1665, Isaac Newton socially distanced himself from the horrors of the then rampant bubonic plague and – away from his burgeoning academic career at Trinity College in Cambridge – enjoyed a ‘year of wonders’ at his childhood home. During this period he formulated a theory of universal gravitation, explored optics and discovered differential and integral calculus.

The COVID-19 outbreak has led to unprecedented volatility and tremendous declines in wealth, but we have faith that once the pandemic is defeated, the wild swings in the financial markets will abate and prosperity will return. But what cannot be so easily recovered is the loss of a job, the loss of a business, or, worst of all, the loss of a loved one. While it is our duty to provide timely market insights, please know that now, more than ever, the health and safety of you and your families is at the forefront of our minds.

It can be unsettling for investors when their portfolios and the markets start heading into the red. Here are six investing basics to keep in mind during volatile times.