The decision of the Office of National Statistics (ONS) to leave the calculation methodology of the retail price index (RPI) unchanged has seen bond prices soar and also given a boost to utilities. The ONS said: "The advantages continuity support continuing with the existing methodology",
Shares in the utility sector were lifted across the board on the RPI announcement. Martin Brough, analyst at Deutsche Bank, said: "In theory this could be worth perhaps 10 per cent for equity values of regulated companies, but in practice less if real allowed returns are cut in the long term". Mr Brough thinks the move is positive for United Utilities (UU), Severn Trent (SVT), Pennon (PNN), National Grid (NG), and to some extent SSE (SSE), as well as a slight positive for Drax (DRX), which has regulated renewables revenues.
Regulated utilities have revenues (and asset values) linked to RPI, so the higher inflation under the existing methodology will allow both revenues and regulatory asset bases to rise more quickly. But it's not all good news; utility companies also have some debt indexed to RPI, and regulators may limit the returns that utilities can achieve if inflation gets too high. This will be of particular interest to water company investors as that sector moves towards price reviews next year.