RPI is calculated from the average price changes in a number of goods and services (Reuters)
The National Statistician, which governs the Office for National Statistics (ONS), will consult on changing how the Retail Price Index (RPI) measure of inflation is calculated to a way that is likely to bring the headline figure down.
It is attempting to limit the "formula effect" difference when compared to the Consumer Price Index (CPI) figure, which would bring the two closer by altering the way RPI is calculated to bring it more in line with how CPI is formulated.
As well as affecting investors in index-linked gilts, a lower RPI figure would hit wage negotiations between workers and employers who would see a smaller increase in their salaries.
However it could also bring the cost of private sector contracts held by the government down, as some have price adjustments tied to RPI.
There is also potential for slight relief for rail commuters, whose increasing train fares are linked to RPI.
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Index-linked gilt holders could see lower returns if the RPI rate, meaning the Bank of England will be in detailed discussions with the ONS over any proposed changes.
Should the Bank attempt to block any changes the National Statistician wishes to make, officials may look to Chancellor George Osborne to overrule the central bank and force them through.
"Only if the Bank considers a proposed change to the RPI constitutes a fundamental change that is materially detrimental to the holders of index-linked gilts, would the agreement of the Chancellor of the Exchequer be required before the change could be made," said the ONS.
An RBS research note said that economists at the bank "believe that the most likely end game is extinction for three reasons".
"First, the logical case for making the change is so overwhelming; second, the chancellor will benefit from the proposal: with a constant CPI inflation target it doesn't matter how you eliminate the wedge, RPI inflation ends up lower, and hence so too do payments linked to RPI; third, it can and should be argued that around half of the resulting revision to RPI inflation will simply undo the unintended consequences of a methodological change in the collection of clothing quotes that caused the formula effect to roughly double."
The Treasury distanced itself.
"This is all done at very much more than arm's length from government. This is not a government process," said a Treasury spokesman.
"Relevant legislation proscribes that the ONS, overseen by the UK Statistics Authority, are the people who are in charge of new statistics, the dissemination of official statistics and also the calculations used to determine things like RPI. So there's no involvement for ministers in this.
"We wouldn't get into speculation because it is an independent process."
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