It is always dangerous to allow inflation figures to be fiddled

Allister Heath
HERE is a rule that never fails: whenever the authorities decide to change the way they measure inflation, reach for your wallet, because you are about to be stealthily robbed. Each revision inevitably discovers that inflation was, in fact, lower than we realised, which means that all is for the best in the best of all possible worlds, interest rates can safely be cut and your pay rise or inflation-protected gilt is suddenly worth a lot less.

There may in theory be good technical reasons to change the way the retail price index (RPI) is measured, which would roughly bring it into line with the lower consumer price index. But at some point we need a cost of living measure that actually reflects what is happening, rather than a scientifically perfect index which defines away price hikes thanks to technological progress. It is hard to compare a £1,000 computer today with a £1,000 computer of a decade ago. Every £1 spent today buys more computing power, which means that the real value of the computer has plummeted even if its price has remained the same or even gone up; this point is made by the brilliant Paul Ormerod on page 20.

But there is a danger in pushing that argument too far. Remember the last time the measures were changed in 2003: Gordon Brown, partly to harmonise the UK with the Eurozone at a time when membership of the euro was still possible, and partly because it allowed a loosening of monetary policy, changed the Bank of England’s inflation target from 2.5 per cent on the RPI-X measure to 2 per cent on the Harmonised Index of Consumer Prices (HICP), renamed the CPI to placate UK Eurosceptics. Yet because the gap between the two measures was greater than 0.5 per cent, monetary policy was loosened at the worst possible time, helping to fuel the credit and housing bubble that ultimately destroyed the economy. It was an idiotic decision to make. “Reforming” the RPI wouldn’t be as bad. But it will slash the value of index-linked gilts, hit pension funds and reduce pay hikes. The biggest negative downside, however, is that it will make those in authority even more complacent about the silent thief that is inflation.

THERE were crippling problems with the old Financial Services Authority, which failed miserably. Martin Wheatley, the new boss of one of its successor organisations, the Financial Conduct Authority, is a breath of fresh air who will hopefully be a much more effective regulator.

But his usually impeccable judgement failed him yesterday: he was undoubtedly exaggerating to emphasise a point, but his remarks that he “would shoot first and ask questions later” were inappropriate.

Regulators imbued with extreme powers should not joke about ignoring basic justice and the rule of law. Regulators have rightly complained about the culture of some private institutions, saying that the right tone needs to be set by those at the top – but the same should apply to regulators, prosecutors, the police and all of those entrusted with ensuring an orderly society.

Britain needs an effective regulatory agency that roots out fraud and pitilessly prosecutes law-breakers. But it also needs a fair and just one that doesn’t destroy the reputations or livelihoods of innocent people in the process. All must be deemed innocent until proven guilty. It can’t be beyond the ability of the FCA to design a system that catches bad guys without massive collateral damage. Regulators seeking to demonstrate their toughness must remember that rough justice is no justice at all.
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