MNI INSIGHT: Momentum Grows For UK Infla Target Switch To CPIH

--CPIH Re-designated As National Statistic 

--Opens Door To Govt Switching Inflation Target

By David Robinson

     LONDON (MNI) - The news Monday that CPIH, the inflation measure that

includes housing costs, has been re-designated as a national statistic throws

the door wide-open to shifting the inflation target from the Consumer Price

Index (CPI) to CPIH.

     CPIH was de-designated as a national statistic in 2014, but the problems

with it were seen as technical and surmountable and have now been overcome, with

the statistics regulator announcing Monday that CPIH was up to scratch. The

Chancellor of the Exchequer, currently Philip Hammond, announces the inflation

target for the Bank of England Monetary Policy Committee in each annual budget

and this Autumn Budget will be his first chance to change the inflation target.

     There is a view, in policy making and City circles, that there is a case

for delaying a switch to CPIH. This is because people want time to see how the

newly approved CPIH measure behaves before issuing CPIH linked debt or targeting

it.

     "Given the profile and relative infancy of CPIH, some users we spoke to

expect to further monitor CPIH themselves before deciding whether and when to

use the measure," Ed Humpherson, Director General for Regulation, said in his

letter published Monday announcing the re-designation of CPIH as a national

statistic.

     The counter argument is that there is a risk of circularity in pushing for

a delay in using CPIH because of its unfamiliarity. If CPIH is not set as the

inflation target and gilts are not linked to it, then little attention may be

paid to it and people will claim to be unfamiliar with it.

     "If it (CPIH) were adopted as the inflation target that would in itself

make it the focus of attention," Martin Weale, the former MPC member who sits on

the experts panel at the Office for National Statistics, said in an MNI

interview published Friday.

     Back in June 2003 then Chancellor of the Exchequer Gordon Brown announced

that he was switching the headline inflation measure from retail prices to CPI,

bringing UK practice into line with the European standard. It was only six

months later that Brown announced that he was changing the MPC's inflation

target from 2.5% on the RPIX (RPI ex-housing costs) measure to 2% on CPI.

     Hammond has shifted to having one Budget a year, in the autumn, so if he

does not move to a CPIH target this time around it would be autumn 2018 before

the move was made. Hammond could, however, get CPIH into the spotlight by

announcing in this Autumn Budget that he intended to switch to a CPIH target in,

say, a year's time.

     The switch away from a European standardised measure could also offer

Hammond, seen as one of the Cabinet's less ardent Brexiteers, good political

cover by dropping a standard favoured by Brussels.

     Humpherson's letter also noted that the debate is still going on over the

best way to gauge consumer inflation and how to measure owner occupier housing

costs. CPIH uses rental costs as a proxy for owner occupier costs, but there

have been diehard critics of this method involved in the expert debate over

CPIH.

     "There is no consensus on a single right way to do this, and this lack of

agreement is likely to continue. We consider that ONS's decision to choose the

rental equivalence approach over alternative approaches is reasonable,"

Humpherson said.

     Weale, who has been involved in the discussions over price indices through

the years, said that familiar faces keep making the same arguments for or

against the CPIH methodology, but noted that ongoing debate is no reason not to

press ahead and adopt it as the headline inflation measure.

     "You have to come to some sort of decision. You have all sorts of other

bodies where you have a range of views and the job of the National Statistician

is to listen to them and to think about them and to come to a conclusion," he

said.

     Using CPIH as the headline inflation measure and switching the inflation

target to it would step up the pressure on the Debt Management Office to stop

issuing RPI linked gilts.

     The experts are united in the belief that RPI is a flawed measure, which

begs the question why UK inflation linked debt, and other things such as student

loans, continue to be based on it. One argument has been that there is little

point in moving away from RPI and creating a thin market in CPI based debt if

CPI is in turn going to be replaced by CPIH, but this only strengthens the case

for adopting CPIH as soon as possible.

     The door is now wide open for Hammond and his Treasury officials to adopt

CPIH, the only real question is how fast they will chose to do so.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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