The cost of living is a growing source of contention. In particular, the Government's preference for the Consumer Prices Index, rather than the old Retail Price Index, to measure inflation, has come under attack. The bitter dispute between the Government and the public service unions over new pay settlements has thrown a spotlight on the divergence between the two measures. There is also a general sense among the public that the cost of living is going up at a faster rate than the Government's preferred statistics indicate.
So which measure of public buying power is more accurate? The difference between the two indices should not be exaggerated. There are minor divergences in methodology, but this in itself has no significant impact. Both indexes include the key factors of food and energy prices. The crucial difference is that RPI takes consideration of mortgage interest costs, whereas the CPI does not. Because some 70 per cent of British households are owner-occupied, that can translate into a significant difference. The divergence between the two indices has grown due to the succession of interest rate rises by the Bank of England that began in September 2006. The RPI fell slightly yesterday, while the CPI remained steady. In time, the two are likely to move closer again.
But it is increasingly clear that the RPI represents a more accurate reflection of public buying power over the long term. There is therefore a case for the Government to return to using RPI as its preferred measure. This would undoubtedly make life more difficult for the Government and strengthen the hand of the public service unions in lobbying for higher pay settlements to keep up with the cost of living. But it would be more honest. It would also have the advantage of preventing Mr Brown from making misleading comparisons between high inflation under the previous Conservative government (measured in RPI) and that of now (measured in CPI).
However, that recommendation comes with two significant provisos. The first is that the Bank of England should continue using the CPI rate for its inflation targeting. When the Bank raises or lowers interest rates, this has an immediate and pronounced effect on RPI because it translates very quickly into mortgage payments. Its effect on CPI is much slower acting. If the Bank switched back to an RPI target, it would risk chasing its own tail.
The second proviso is that the Government must be disciplined enough to put the stability of the public finances above all else. If they are unaffordable, ministers must resist the inevitable pressure that would follow a switch to award more generous pay settlements. The Government must be honest about the cost of living in Britain. But it must also be firm about what measures are necessary for the good of the overall economy.Reuse content