MPC considered changing inflation measure

Robyn Hall

July 22, 2011

During a roundtable in June MPC members discussed whether there would be merit in excluding the volatile prices of “non-core” items, such as food and energy from the consumer prices index.

This index has exceeded the 2% annual target set by the government for much of the past three years. In June, it fell back to 4.2% after hitting 4.5% the month before.

The elevated rate of inflation reflects the temporary effects from a number of factors, including increases in commodity prices, higher import prices following the substantial depreciation of sterling since the onset of the financial crisis, and increases in the standard rate of VAT.

The roundtable paper said: “Some thought that switching to a measure of core inflation, while desirable in theory, would be impractical in the current environment, since there was a risk that changing the measure would destroy confidence in the MPC’s commitment to the inflation target.

“Others argued that such a change was not even desirable, for example because there was little justification for targeting a price index that did not include every item consumed by the typical household.

“Indeed, the flexibility in the current monetary policy remit already enables the MPC to look through volatility in inflation caused by one-off shocks to the price of any item. But that flexibility did not allow the MPC to disregard the price of non-core items completely, as it would do if it were to target core inflation, because it has to take into account any trends in non-core prices when setting policy.”

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