Inflation shows sharp fall on new measure
Thursday 27 February 1997
The harmonised index of consumer prices (HICP) rose by 2.2 per cent in the 12 months to January, 0.9 percentage points less than the target measure of inflation, which is 3.1 per cent.
Leo Doyle, an economist at Dresdner Kleinwort Benson, said: "It looks a pretty solid bet now the UK will meet the Maastricht criterion on inflation."
At the same time it emerged that the Treasury and Bank of England have both become concerned that the current UK retail price index (RPI) overstates inflation. An investigation has been launched to discover whether it is biased upwards in the same way as the US consumer price index.
The drop in the HCIP compared to the current UK measure caught analysts by surprise. But Mr Doyle said: "The method of calculation is very different." Unlike the RPI, the HCIP includes air fares, new cars and computers - all of which are particularly sensitive to deflationary pressures, so would be expected to push the European index down compared to the RPI.
The ONS said that the European measure also used a different statistical method to calculate average price increases, which reduced the new inflation measure. Other countries have yet to publish their harmonised inflation figures, which could also be lower than existing national measures. But Simon Briscoe of Nikko Europe said: "I would be very surprised if we didn't see an improvement in the UK's relative inflation performance." That should increase the chances of the UK meeting the Maastricht criterion on inflation, which says inflation must not be more than 1.5 percentage points higher than the three best performing countries.
The financial markets are likely to embrace the new measure because it makes international comparisons easier. The ONS was careful to make clear that "the HICP does not replace the retail prices index, which remains the best indicator of UK consumer price inflation".
But a shift away from the RPI could be hastened by additional doubts that the existing UK measure overstates inflation in the same way as the US consumer price index. A Bank of England working paper last March estimated that RPI inflation could be overstated by 0.35-0.8 per cent a year.
A report in December -known as the Boskin Report after the chairman of the commission that wrote it - claimed that inflation in the US was overstated by 1.1 per cent because measured prices failed to take account of several ways in which the cost of living had fallen.
However, some critics in the US claim the Commission exaggerated its results. It had every incentive to do so because a rate of inflation lower by 1.1 per cent could save up to $1 trillion (pounds 613bn) on inflation-linked social security payments between now and 2008.
Diane Coyle, page 24
- 1 The difference between a psychopath and a sociopath
- 2 It won’t work, Jeremy: The Health Secretary has lost the confidence of the medical profession in his attempt to reform the NHS
- 3 Kim Jong-un awarded global statesmanship prize by Indonesia
- 4 Dutch King Willem-Alexander declares the end of the welfare state
- 5 Robert Mugabe eats a zoo for 'obscene' 91st birthday party
Nasa discovers yet another rocky exoplanet, and it's only 21 light years away
Labour rallies behind Flint as deputy leader to offset a Corbyn win
Kim Jong-un awarded global statesmanship prize by Indonesia
Dutch King Willem-Alexander declares the end of the welfare state
Calais crisis: Migrants that have made it to the UK reveal how Britain has matched their expectations
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn – or a return to a Labour government
Is Britain really full up? Are migrants taking our jobs? Leading academic answers the most common anti-immigration claims
Calais Migrant Crisis: Deputy Mayor of Calais labels Cameron's use of 'swarm' as 'racist' and 'ignorant'
Labour leadership: New poll shows party is now even 'less electable' than under Ed Miliband
While we fixate on Calais, the Home Office is quietly deporting dozens of migrants on 'ghost flights'
Calais crisis: The seven claims made about the migrants - and the reality
iJobs Money & Business
£30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...
£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...
£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...
£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...