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To: mishedlo who wrote (572)	2/11/2004 2:45:48 PM
From: maceng2	Read Replies (1) \| Respond to of 1417

Rate muddle as many turn to disparate measures By Anna Fifield Published: February 11 2004 4:00 \| Last Updated: February 11 2004 4:00 [the BoE seem to be out of touch with whats going on. They seem to be looking at the UK national picture and ignoring the international picture. I am predicting the UK's "recovery" will be short lived. Meanwhile Gordon Brown et al are fiddling with the inflation statistics... pb] news.ft.com Keeping up with inflation is tricky these days -because there are so many different ideas about what the rate of inflation actually is. The Bank of England's monetary policy committee will today publish its first set of forecasts using the new consumer price index, but employees, pensioners and markets will still be keeping their eyes on the plethora of other measures. Gordon Brown swapped the Bank's inflation target in December from 2.5 per cent under the retail price index excluding mortgage interest payments to 2 per cent on the consumer price index, which excludes the costs of owner-occupied housing. At face value, this meant that the rate of inflation halved - from 2.6 per cent on RPIX to just 1.3 per cent on CPI. As Mervyn King, the Bank's governor, acknowledged last month, that creates a presentational headache for the Bank. "It is important that firms and families making economic decisions understand what the target is, so any change in the target I think is very important and it is of great significance from that point of view," he told the Lords' economic affairs committee. But there is plenty of evidence that the significance of the change has not been fully taken on board or understood - even perhaps by the chancellor himself. Mr King has said the change should make no material difference to decisions on interest rates. The difference, he said, was like moving from fahrenheit to centigrade on a thermometer: the unit changes but the temperature stays the same. But in his pre-Budget report in December, Mr Brown implied the switch to a new inflation target should make a difference to public sector pay. "Because discipline in pay-setting is essential in both private and public sectors, I have also written today to public sector pay review bodies informing them that our inflation target is 2 per cent." Employers could now argue that a 2 per cent wage increase was keeping up with the cost of living, whereas three months ago it would have been half a point below the rate of inflation. Mr King has argued that the RPI measure overstates the true rate of inflation, so a wage rise in line with RPI would actually represent a 0.5 per cent increase in real pay. "The new target will make clearer how much of an increase in money earnings represents a real rise in living standards," he said in a recent speech. However, Alastair Hatchett, a labour market analyst at Incomes Data Services, says that employers will have trouble arguing for pay settlements that exclude the cost of housing. "When people come around to pay bargaining the issue is 'how do I restore the purchasing power I had a year ago?' On that basis the all-items RPI is still the best measure." Indeed, Stephen Nickell, an MPC member, has argued that the switch will lead to higher inflation. Historically, the 2 per cent CPI target has on average been equivalent to 2.8 per cent under RPIX. Prices in the index-linked gilts market, that track RPI, suggest traders expect a higher rate of inflation. When the switch to CPI was floated in last year's Budget, the implied future inflation rate from index-linked gilts rose by almost half a percentage point, though it has since lost some of that rise. The Bank's job could be made even harder when different parts of the economy are tracking different indices. "The government would like us to use the CPI and so would the Bank of England. That would make the target a lot easier to manage," says George Buckley at Deutsche Bank. "But I think a lot of people are still concentrating on RPI rather than CPI."