Treasury tinkers with price index to fiddle inflation

THE Government is trying to force the inflation rate down by getting goods and services that are falling or static in price included in the Retail Price Index.

The move threatens to hit pensioners and other recipients of index-linked state entitlements, such as child benefit and housing benefit. For every percentage point by which inflation falls, the Exchequer saves pounds 300m on the annual cost of uprating state benefits. Taxpayers, meanwhile, will feel the pinch, since personal allowances generally rise in line with inflation.

The move will also affect millions of workers whose pay settlements are linked to the RPI. However, the Exchequer loses out through lower receipts from excise duties, which are also index-linked.

Treasury ministers are understood to have concluded that the index may not accurately reflect the Government's record in curbing inflation, because a number of big-ticket items are omitted from the basket of prices that make up the monthly inflation figures.

Early last year, the Government asked the Retail Prices Index Advisory Committee, an ad hoc grouping of economists, academics and business and consumer representatives that advises ministers on the composition of the RPI, to examine a number of changes to the index.

This resulted in foreign holidays being included in the RPI for the first time this year. From next year, new car prices are also expected to join the index. The committee has also been instructed to examine whether house prices should be included. According to sources close to the committee, it was asked to assess whether new cars should be included, because the Government took the view that the depressed state of the market was likely to have driven prices down.

The decision to ask the committee to examine owner-occupiers' housing costs also coincides with the first nationwide fall in house prices since the Second World War.

'The message from the Treasury was that it didn't feel government policy was getting due regard, because some of the measures of that were not coming through in the figures,' the source added.

The three biggest items in the index in terms of weighting are housing, food and motoring expenditure, so any decision to include both house prices and new cars could put significant downard pressure onthe RPI.

Rent, mortgage interest payments and the council tax are all currently included in the index.

However, the Government has made no secret of its desire to have mortgage payments removed, since increases in interest rates result in higher monthly payments and hence upward pressure on inflation.

The committee is examining three broad options: keeping mortgage payments in; replacing them with house prices, or introducing a new measure of housing costs that combines the two.

Used cars are already in the index. But there is some scepticism about the value of including new cars. Ministers have been told that it could be a difficult and expensive exercise to get reliable and representative figures.