Bank of England urged to include housing in inflation targets

The Bank of England is likely to be asked to target a new inflation measure after an independent review commissioned by the UK Statistics Authority yesterday recommended scrapping the consumer prices index (CPI) as the headline gauge of rises in the cost of living.

The report’s author, Paul Johnson, said CPI should be replaced by a measure of prices that includes owner- occupiers’ housing costs, known as CPIH.

The Bank’s mandate currently compels the Monetary Policy Committee to keep consumer prices, as measured by CPI, rising at an annual rate of around 2 per cent.

A shift to CPIH as the headline official statistical measure of inflation would put pressure on the Government to update the mandate.

“It’s not part of my remit to say what the Bank of England should be targeting, but [speaking] personally it would seem sensible to be targeting CPIH,” said Mr Johnson, who is also head of the Institute for Fiscal Studies think tank.

The UK Statistics Authority, which supervises the Office for National Statistics, will consult on the proposed reform later this year, but City analysts said it was likely the change would be implemented and that an overhaul of in the Bank’s mandate would ultimately follow.

Michael Saunders, an economist at Citi, speculated the Chancellor, George Osborne, could announce the shift as early as March’s Budget.

The move would be unlikely to meet much resistance from Threadneedle Street. Andy Haldane, the Bank’s chief economist, told the Treasury Select Committee last year that it would be more appropriate to target a measure of inflation that reflects changes in housing costs.

The ONS’s experimental CPIH index has tracked the CPI relatively closely since 2006 – never diverging by more than 0.5 percentage points – and both currently show a 1 per cent inflation rate for November. But CPIH’s status as a national statistic is currently suspended as statisticians investigate fears that it has been underestimating housing costs.

And Mr Johnson added that even if changes in the indices were close today, this might not always be the case. “In the long run these things may look very different,” he said.