Inflation to include housing costs from next year

A technical change to the way inflation is measured may appear to be of arcane indifference, but the tweak by the Office for National Statistics (ONS) will effectively reduce "real" wage growth – and that could eventually result in higher interest rates and more generous increases in pensions.

At the moment, the ONS takes the Consumer Price Index (CPI) as its main measure of inflation.

This rate, which was one per cent in September, is used to set annual increases in pensions, benefits and income tax thresholds, says The Times. It's also the benchmark for the Bank of England's two-per-cent inflation target.

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However, from March, the ONS will instead use an augmented version, CPIH, as its headline measure. This includes homeowner costs and council tax and is generally 0.2 to 0.3 per cent higher than CPI.

Britain has long "stood out in having a domestic headline measure that ignores owner-occupied housing entirely", says the Financial Times.

While the new measure is imperfect – it uses private rental costs as a proxy for mortgage and other housing expenses – it will still give a better reflection of the change in day-to-day living expenses.

As costs will be seen to rising at a faster rate, the move will reduce the statistical level of "real" wage growth - the average increase in pay minus the drag effect of inflation.

If adopted by the Treasury, it could also accelerate an interest rate rise from the Bank of England and keep borrowing costs higher in the future. In addition, it would mean improved increases in benefits and pensions.

So far, though, the government has said it has no plans to switch, citing the removal of the "national statistics kitemark" from the new benchmark in 2014, amid discrepancies in how rental increases were being measured.

Jonathan Athow, the director general of economic statistics at the ONS, told the FT he "hoped the UK Statistics Authority would soon return the… kitemark to CPIH".