BoE target moves further out of range as inflation bloats to 2.8%

The rate of inflation in Britain rose to 2.8% in February, pushed up from its recent low by rising energy costs - and the ONS has thrown in a new measure to confuse everyone...

by Michael Northcott
Last Updated: 19 Aug 2013

The prospect of getting CPI (consumer prices index) inflation down to the Bank of England’s target of 2% is edging out of reach again, as soaring energy prices coupled with an intolerably chilly winter have pushed it back up to 2.8%. That’s up from 2.7% in January and marks the highest it has been since May last year. It’s a blow for the governor of the BoE, Mervyn King, who has been banking on inflation dropping in 2013: before today it had been stuck at 2.7% for four months in a row.

CPI is a measure of the changes in prices of consumer goods and services purchased by households. But the Office for National Statistics threw a further spanner in the works by publishing – for the first time – a new measure of the retail prices index (RPI), which is now called RPIJ. Normal RPI takes things such as council tax and fluctuations in the interest rate on mortgages into account. But apparently the new measure is more in keeping with international standards, according to OFT, which said it fell from 2.7% in January to 2.6% in February. Using the usual RPI, the figures would be 3.3% down to 3.2%.

The measure, if officially adopted by the government, would affect the setting of state pensions, the cost of rail travel and water bills. Naturally, all of these industries have voiced their support of moving to the RPIJ measure instead of sticking with RPI. A lower rate of inflation means their balance sheet figures will look better and real-terms cash investment would be smaller each year. But Merv says the new measure is flawed, so it looks like we’re stuck with it, unless his successor, Mark Carney, chooses to do something different come June. 

Still, according to our current system, the inflation situation isn’t ideal. It has risen on the most commonly cited measure of CPI, and just a day before George Osborne is due to reveal is latest Budget. Given falling wages, and the shrinking value of the pound, he could really have done without a negative result on this key economic measure with just 24 hours to go…

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