Calculating cashflows on UK index-linked gilts currently relies on RPI. So plans to cease publishing this key inflation measure, and use Consumer Price Inflation instead, have introduced plenty of uncertainty to pricing in the market.
- The Chancellor has intervened to delay the proposed changes until after 2025, at the earliest, but questions still remain in the index-linked gilt market about how and when RPI will be replaced.
- The considerable uncertainty as to which inflation measure will be applied to UK index-linked gilts after 2025 is making determining valuations of bonds more challenging.
- The shapes of the real yield curves and breakeven inflation rate curves differ depending on the underlying assumptions you make regarding the inflation rate used.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.