How do you like your inflation? To be really up with the zeitgeist, you favour CPIH, the trendy new version of the Consumer Price Index, with added housing. Mind you, according to the Office for National Statistics, this is “not a national statistic”, although any minute it will become the officially recognised measure of inflation. Helpfully, both measures came in at 2.3 per cent for February.
Official recognition does not mean everything will be judged by this new yardstick. The even older one, the Retail Prices Index (also “not a national statistic”) will still dictate the changes for index-linked bonds, National Savings and much more. Economics purists dislike the RPI because it is not rigorous enough. The government dislikes it for the systematic upward bias it produces for its inflation-linked obligations.
Switching to CPI saves it money. Given the relentless rise in house prices, you might think that switching to CPIH would produce a higher figure. You would be wrong. A retrospective analysis from Bond Vigilantes demonstrates that CPIH lags CPI by 0.15 per cent a year. So the change both sounds more comprehensive and saves the state money.
Inflation, usually defined as a change in the general level of prices, is hard to measure accurately, so the temptation for governments to fiddle the figures is never far away. The RPI may be flawed, but it was generally accepted as a reasonable proxy for a move in the cost of living, which is what matters.
The more the government changes the measure, the greater the opportunity for lobbyists to claim that a special (higher) rate should apply to media, pensioners or some other interest group. The public has been persuaded to say RIP RPI, which was hardly even reported this week, but each change risks damaging credibility. For the record, the RPI rose by 3.2 per cent in the year to February. Ouch.
Dear rem.com: keep it simple
David Richie was paid his contractual entitlements when he “stepped down” as boss of Bovis, the housebuilder that makes all the others look competent. There’s a £242,180 lump sum, £338,250 in lieu of notice, a £55,000 bonus (sic) which may be subject to clawback, and a contribution towards “outplacement counselling.” A long-term incentive plan could yield close to another half million pounds, depending on the share price.
During his nine-year tenure, housebuilders made out like bandits. Bovis, mired in problems from selling unfinished homes last year, is now the subject of at least one takeover bid, and it’s safe to say that Mr Richie’s reign was not a resounding success. However, he can’t be blamed for taking the money. A contract is a contract. The real blame lies, as so often, with the remuneration committee and its advisers.
This booming industry presumes that every CEO must be festooned with complex incentives to get the boss out of bed every day. There is little evidence that these incentives really work for the long-term benefit of the business or its shareholders. Of course, if the board said: “Here’s the salary, do you want the job?” there would be no reason for the consultants to charge all those fees.
Mixing business with pleasure
You may not be able to tell Stork from butter, or Fever-Tree’s fancy tonic water from Schweppes, but there is no arguing that it is the stand-out new issue of 2016. It is now valued at the same price as Britvic, and nearly three times that of AG Barr, of Irn-Bru fame, whose sales are 2 1/2 times Fever-Tree’s £100m.
Despite the world-conquering prospects, this valuation looks, well, feverish. However, Fever-Tree is quoted on London’s junior market, and a quirk of inheritance tax rules that shares quoted on AIM are not really quoted at all, and attract the same breaks as unlisted investments.
Those, ahem, elderly investors wealthy enough to have one eye on IHT avoidance are likely to have the other eye on the evening G&T, perhaps powered by Fever-Tree’s mixer. It’s a business they can understand, and if they suspect they may not be able to enjoy many more sundowners, the price paid for their shareholding is not that important, provided it holds up longer than they do. Chin chin!
This is my FT column from Saturday