Why does the government use 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 inflation target for CPI is 2%. Why does the government target inflation? In 1997, when the government gave the Bank of England independence to set interest rates, it gave the bank an inflation target. The idea was to give markets and individuals more certainty about inflation, so that they could plan for the future. The Bank of
