Treasury looks for broader price index

The Treasury and Central Statistical Office have recruited independent researchers to design a new measure of inflation, known as a whole economy price index (WEPI). This would be a monthly measure of prices, broader than the retail price index, and could eventually replace the RPI as the targeted measure of inflation.

Research has been commissioned on a new monthly index because the RPI is thought to be too narrowly focused on the consumer sector. A broader index, taking in the cost of investment goods and public sector prices, would be more suitable for inflation targeting. However, the natural measure - the price deflator calculated by dividing nominal by real national output - is available only with a long delay and subject to big revisions.

The CSO confirmed recently that it was considering publishing a third retail price index every month, although it would not comment on rumours in the financial markets that it would start next week. It already publishes the headline RPI and the index excluding mortgage interest payments, the RPI-X.

It is likely to add RPI-Y, which also excludes indirect -taxes such as VAT and excise duties. RPI-Y is know to be preferred by the Bank of England as a less distorted measure of inflation.

The project to design a WEPI was initiated by Bill McLennan, the outgoing director of the CSO, in conjunction with the Treasury. The work is being carried out by the National Institute of Economic and Social Research, an academic research body, and the economic consultancy NERA.

Switching in the meantime to an inflation target based on the RPI-Y could attract some criticism. The RPI-Y rose 1.7 per cent in the year to December, compared with a 2.9 per cent inflation on the headline measure.

Peter Westaway, a researcher at the National Institute, said: ``In the long run a switch might be sensible, but it would not enhance credibility at the moment.''

The contracting out of work on inflation measures follows the CSO's commissioning of research from Cambridge University on constructing a monthly measure of national output.