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Monday
Nov142016

CPIH to replace CPI as UK inflation target

The ONS recently announced that the UK inflation target will effectively switch from CPI to CPIH. There's pros and cons to all inflation measures, and generally speaking a movement towards broader financial assets (such as housing) seems sensible. One concern, however, is the potential for changes in the inflation target to impact the monetary stance.

For example, from 1997 to 2003 the target was the Retail Price Index (RPIX). For most of this period, it was below the 2.5% target but was elevated throughout 2003, and by November hit 2.9%. Ordinarily, this would be a sign that monetary policy should be tightened, and that inflation was too high. However the CPI was only growing at 1.4%, significantly below the new target of 2%. All of a sudden, purely due to the change in policy, monetary policy appeared too tight. This became a non trivial driver of looser monetary policy.

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