The Retail Price Index (RPI) has been the default inflation measure for some time now, however, many critics have argued that the figures are not always accurate and produce unusual results.

As a result, the government has announced in November 2020 that the RPI will be replaced by Consumer Price Index (CPI) and Consumer Price Index with Housing costs (CPIH) – being phased out by 2030.

What is the difference between RPI, CPI and CPIH?

RPI, CPI and CPIH are indicators that track inflation by annually measuring the cost of selected goods. However, as the metrics don’t use the same items to calculate the final figure, each indicator can result in producing very different inflation figures:

  • RPI tracks 730 items;
  • CPI tracks 650 items; and
  • CPIH tracks those same 650 items, but also factors in council tax and housing costs.

What does the change mean for landowners?

In almost all property agreements where indexation is a factor, RPI is often always accepted as the benchmark for inflation, without other options being considered. As this measure doesn’t account for other factors, such as council tax and housing costs, not choosing the most appropriate inflation measure can have massive implications on the values within property agreements – potentially proving you with much lower, or much higher, income or receipts.

The phasing out of RPI will likely shake up property prices and, if appropriate inflation measures are not taken into account, could potentially jeopardise any future earnings. Therefore, to give yourself enough time to adjust and monitor the potential impact it may have on any agreements you have in place (or are currently negotiating), it’s crucial that an informed decision about which inflation metric to use going forward is made well before 2030 .

Given that many property agreements can last over 20 years (such as those relating to the promotion and development of land) and can span across several periods of financial turbulence. It is important to ensure that you are being properly compensated in property negotiations, especially at a time when the property market is particularly volatile.

What should landowners do to prepare now?

You can take two immediate actions to mitigate the impact of the switch:

  1. Agreements that have been entered into recently, but end after 2030

Most property agreements do not state which other measure of inflation will be used in place of RPI. Instead, they can state that if RPI no longer exists at some point in the future then both parties will reasonably try to agree an alternative measure. However, as naturally both parties will want to choose a metric that suits their own needs, these conversations can often lead to a stalemate.

With RPI not being phased out until 2030, both parties have ample time to measure the data over a number of years. Having this insight will allow everyone time to negotiate and make an informed decision on the most appropriate measure that works for everyone involved.

  1. Agreements that have not yet been made

If you’re in the middle of negotiating an agreement then deciding which inflation measure is used should form part of the discussion.

If RPI found to be beneficial at the current point of negotiation, then using it now may still be the most logical choice. However, there should still be discussions now as to which metric will be used in 2030, once RPI is phased out.

We’re here to help

The phasing out of RPI is a major change that will affect existing agreements, ones in the middle of being negotiated and ones in the future. Being aware and fully understanding the changes is key to negotiations, as different metrics will affect different parts of your business and the transaction.

Therefore we advise speaking to professionals before concluding any negotiations. Consulting with legal advisors, as well as accountants, financial advisors and land agents will provide you with a holistic view of your position and give tailored advice on the benefits and drawbacks of each inflation benchmark.

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Ben blends technical excellence, sheer discipline and a pragmatic approach to ensure that his clients achieve their goals.

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Published: 3rd August 2022
Area: Real Estate & Planning

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