Backward step

Letter in the Daily Telegraph By Prof. Philip Booth

Sir - The Chancellor of the Exchequer's decision to target inflation using the technically flawed harmonised index of consumer prices (HICP), familiarly known to economists as the Hiccup, instead of the present measure, the retail price index (RPI), is flawed.

The true measure of inflation is the rate at which the purchasing power of money is declining. Gordon Brown's Hiccup cannot represent this, because of how it is computed. It includes a narrower range of goods and services than the RPI and it excludes some important ones. It is a step back to the way share indices were calculated before computers were invented.

If the Chancellor believes that the Hiccup is a better measure of inflation than the RPI, why has he said that he will not use it for uprating benefits?

Perhaps there is another motivation for the change. The Treasury has said that it will not use the new index for computing payments due on index-linked gilts, which are important investments for pension funds, giving them protection against inflation.

But in January 2002, the Chancellor gave himself the sole power to change the price index used for calculating payments on new index-linked gilts, subject only to consultation with a body that the Chancellor regards as independent. With £78 billion of index-linked gilts in issue, the sums involved are non-trivial.

The private sector has its Enrons now and again. But standards of governance in the private sector in general outshine those in the public sector.