George Osborne, UK Shadow Chancellor, to change inflation target?

In a speech this morning, the Shadow Chancellor George Osborne hinted that he might change the UK’s inflation target if the Tories form the next Government (and it’s difficult to see how they can muck it up from here).  Currently the Bank of England must set monetary policy to keep CPI inflation within the band 1% to 3%, and must write a letter to the Chancellor in the event of "missing".  With the benefit of a bit of hindsight, commentators are saying how stupid it was not to also target house price inflation (and to be fair to Mervyn King he had publicly criticized the CPI measure on that basis as long ago as 2006), and that by ignoring them, rates were kept too low for too long, and the property bubble resulted.

It’s hard to predict what a Conservative inflation target would look like, but let’s assume they are elected in May 2010, and that they include some measure of house price inflation (HPI) in their target. Let’s also assume that this house price crash is as long and severe as the last one from mid 1989 to mid 1995 (chart here).  If that were the case, then although we’ve seen the steepest falls in prices, we might not see a rising trend in prices until 2012 or 2013.  On this simple, and highly speculative analysis then, including house prices in the Bank’s inflation target could cause them to keep interest rates lower than under the current regime for the next few years (the electorate won’t complain about that).  We could eventually therefore see higher levels of core inflation for a given level of interest rates.  The bond markets won’t like that.  It is also possible that if housing prices did boom again, that the Bank would have to live with negative core inflation rates (deflation) until house prices stabilised again. The appropriate weighting of asset prices within an inflation target is going to be the topic of a very interesting debate.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

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