Last week, the Office for National Statistics (ONS) announced a significant change in how it publishes its inflation report.
From March 2017, the ONS will drop the current consumer price index (CPI), in favour of the CPIH, a consumer price inflation gauge which will include a measure of the owner occupiers' housing costs. The change is particularly important as it comes at a time when the Bank of England expects inflation to soar well above its 2% target over the next 12 months, as Britain comes to terms with the weaker pound.
According to the latest inflation report released by the ONS on Tuesday (15 November), inflation grew 0.9% year-on-year in October, down from 1% in September and falling short of forecast for a 1.1% increase.
So what impact will the change have?
What is the difference between CPI and CPIH?
CPI measures inflation by examining the weighted average of prices of a basket of goods and services, such as transportation, food and medical care. Each month, the price changes for each item in the basket are added together and averaged. In short, CPI indicates how far money in our pockets can get us. If if the inflation rate as measured by CPI stands at 2%, a loaf of bread that costs £1 in 2016, will cost £1.02 in 2017 and so on.
CPIH, however, will include what the ONS describes as occupiers' housing costs (OOH), which include expenses such as mortgage payment, dwelling insurance, estate agents' fees and maintenance and/or renovation costs.
According to the ONS, the OOH amount to approximately 10% of total household expenditure – as measured by the UK's National Accounts – but are not included in the current inflation index.
Does the inflation figure change between the CPI and CPIH?
Yes it does. For example, the headline inflation figure measured in September would grow from 1% under the CPI index to 1.2% under the CPIH and some economists have argued that in the long-term changing the gauge of inflation could have important implications for incomes and the economy.
For example, the Bank of England sets its benchmark interest rates with a reference to a 2% inflation target as measured under CPI and the same goes for benefits, state pension and tax thresholds.
Why has the ONS decided to change the measure of inflation?
Jonathan Athow, the ONS's director-general of economic statistics, said CPIH was the best option available to measure inflation.
"From our point of view we want to signal what we think is the best measure," he said.
"We are certainly not alone in using this among statistics offices around the world. We think it's the best measure."
The ONS acknowledged the decision to change was not without risks, given CPIH has recently lost its status as a "national statistic" due to a string of errors and conceptual difficulties in gauging rent changes in the private sector.
Furthermore, CPIH is rarely used when it comes to setting wages, pensions and other regulated prices such as water bills and rail fares. However, the ONS said it had been considering the option of introducing CPIH for several years and it hoped the index would soon regain the "national statistic" status.
Crucially, should the measure fail to do so, the ONS said it would go ahead and implement it anyway, despite having previously pledged to avoid such a scenario.
How has the move been received?
To say the reaction to the ONS announcement was mixed would be an understatement, as a number of senior policymakers and economists have come out against the proposed change.
"My understanding was if there was going to be a change it would take place more gradually," said PwC senior economic adviser and former BoE policymaker Andrew Sentance. "Not everyone is convinced that CPIH is the right measure and yet the ONS are pressing ahead with it on quite an accelerated time scale."
Jill Leyland, a fellow of the Royal Statistical Society, warned the change would leave the general public short of a measure that reflects their experience of inflation.
"We are concerned about some ongoing issues with this measure, which were reflected in its de-designation as a national statistic," she said.
"CPIH, which as a derivative of CPI was primarily designed for macroeconomic purposes, does not give the public a price index which measures the actual impact of inflation on households to replace RPI."
However, Matthew Whittaker, chief economist of the Resolution Foundation, welcomed the change and said the switch would change the picture of income growth.
"Once CPIH has proved itself worthy of national statistic status it makes sense to establish this as the default measure of inflation for use by government and researchers alike," he explained.