Why does the government target the CPI rate?
Until 2003, the government targeted a rate of inflation known as RPIX – which, unlike the RPI measure, excludes mortgage interest payments. However, in his pre-Budget speech in December 2003, Chancellor Gordon Brown said the inflation target would be switched to the CPI measure with immediate effect. The government cited three reasons why CPI was a better measure for the purposes of setting monetary policy: • it gives a more realistic characterisation of consumer behaviour • it gives a better picture of spending patterns in the UK • it is a more comparable measure of inflation internationally and represents international best practice The government’s current target for CPI is 2%, which the Bank of England is tasked with hitting. If the rate moves by more than one percentage point either way – that is, it breaks out of the range 1-3% – the governor of the Bank of England must write to the chancellor to explain why.
