Newsletter Spring 2017

Will we see a change in the main inflation measure?

Over the years we have had a number of different ways of measuring inflation. These measures are important for many reasons but are especially important as a basis for altering the amount of pensions and benefits that are paid. The Office for National Statistics has announced it is changing its preferred measure of consumer price inflation from Consumer Prices Index (CPI) to CPIH from March 2017.

The H in CPIH refers to the costs of housing services associated with owning, maintaining and living in one’s own home. The Office for National Statistics wants to counteract criticisms of the CPI that it does not reflect many costs of being a house owner, which make up 10% of people's average spending.

Currently, the government uses CPI as the measure of consumer price inflation. The government has not announced any plans to change the use of CPI for the purpose of uprating benefits. It should also be noted that the Bank of England’s Monetary Policy Committee sets its base interest rate with reference to a 2% CPI target.

Generally CPIH is usually a higher figure for overall inflation than CPI, so if the government were to change the preferred measure, there could be important implications for incomes and the economy.

What about RPI?

Many of us continue to regard the Retail Price Index (RPI) as the main measure of inflation. The Office for National Statistics has concluded that RPI is not a good measure of inflation and does not realistically have the potential to become one. As the RPI is used in a large number of commercial contracts, including index-linked gilts, it will continue to be published but, clearly, the writing is on the wall for this index.