New index heralds inflation rise

Click to follow
The Independent Online
THE Government is poised to relax its inflation target, tacitly admitting that its battle against rising prices is not succeeding, writes Paul Routledge.

With inflation at a 27-month high, Treasury chiefs are planning to introduce a new target of 0 to 3 per cent, probably in the November Budget. The present target, set by Norman Lamont when he was Chancellor, envisages a range of 1 to 4 per cent, but the Government is committed to keeping inflation in the lower half of that band.

"Kenneth Clarke will argue that he is tightening the target, but in fact the opposite is true. He is preparing the country for more inflation, not less," said a senior adviser in the Shadow Treasury office.

The headline rate of inflation last week shot up from 2.9 to 3.3 per cent, and the Government will next month switch to a new index of rising prices that will exclude mortgage interest payments and indirect taxes such as VAT. This measure is currently running at just under 2 per cent.

The switch will benefit the Government in two ways: by "lowering" the rate of inflation, and by excluding the impact of Budget increases in indirect taxes, the Chancellor's favourite method of raising revenue.

At the same time, the Government is discontinuing publication of its discredited Tax and Prices Index, introduced during the Thatcher years to make political capital out of falling taxes. With taxes now rising, the TPI has embarrassingly outstripped the old inflation index and stood at 3.9 per cent last month.

Treasury sources admitted that changes are pending. "The present inflation target runs out in two years' time," said a senior figure. "There is going to be a new one." When Mr Clarke unveiled his Budget last November, he conceded that inflation would rise this year but insisted it would fall to the lower half of the 1-4 per cent range by the end of this Parliament in two years' time. However, inflation has been on a rising trajectory since last autumn.

Shadow Treasury minister Andrew Smith said: "It looks like they are trying to pull the wool over people's eyes. People will be absolutely furious that the Government are taking taxes and mortgage payments out of the index just when these are hitting people harder than ever."