Discussions to change inflation measures

Grainne 2

The Head of Fiscal Studies, Paul Johnson, has compiled a review of price measures in the UK, and as part of this review, has submitted an argument suggesting that we should abandon the primary measure of inflation, the Consumer Prices Index (CPI), and to replace it with the CPIH which includes housing costs.

Housing costs consist mainly of mortgage interest payments, which represent approximately 12% of CPIH. As it is such a substantial figure, Mr Johnson argues that it should be included when calculating inflation figures, as, home owners with lower levels of income may experience greater levels of inflation during high interest environments.

The current rate of inflation in the UK is 2% and is largely controlled by interest rates, set by the Bank of England’s Money Policy Committee. The inflation rate and its method of measure is therefore important to the larger economy.

In reality, since it started in 2006, the CPIH has been either the same or slightly lower than CPI; the most recent set of inflation figures are almost identical, with both reporting inflation as 1%.

Mr Johnson’s main argument for change is that there is an ‘unhelpful proliferation’ of indices designed to measure prices in the UK. This includes the use of the old Retail Price Index measure, which is still used to determine regulated train fares, interest paid on some government bonds and student loans.

If accepted, the UKSA will launch publicly during the latter part of 2015.