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Between 1993 and 2006 the Institute RPIX forecast was no worse than Naive 1 in 8 cases and no worse than Naive 2 in 10 cases out of 14.
The Chancellor announced in the Pre-Budget Report that the measure of inflation that is targeted has switched--effective from 10 December 2003--from the RPIX, retail prices excluding mortgage interest payments, to the Consumer Prices Index (CPI)--the name by which the National Statistician has decided that the Harmonised Index of Consumer Prices (HICP), the European Union's standardised measure of inflation, will be known in the United Kingdom.
Governor Mervyn King has already indicated that the switch was unlikely to have an impact on interest rates, particularly as forecasts of slower house price growth should cause the difference between RPIX and HICP to narrow.
5 per cent is the target rate for RPIX that was formally adopted by the chancellor of the Exchequer, Gordon Brown, in 1997.
But, between May 1997 and March 2001, annual RPIX inflation has averaged 2.
RPIX has proved to be an effective measure for the Bank, however, with the financial press and the public adapting to it over time.
The use of RPIX means that housing costs are under-represented in the inflation target.
Our focus is on the National Institute's quarterly forecasts of one-year ahead RPIX inflation (ONS code CHMK), the principal monetary policy target for much of the sample period.
Under RPIX, inflation was at or above target for the whole of 2003.
On Tuesday of this week inflation figures for the UK were released and came in well ahead of market expectations with the key RPIX measure rising 2.
Switching from the RPIX to the HICP might be desirable at some point in the future, not least because the HICP formula is less susceptible to an upward bias in measured inflation.
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