Previous posts have suggested that the Bank of England has adopted a looser interpretation of its remit in order to justify maintaining its current policy stance despite a significant inflation overshoot ("inflation targeting lite"). This is based partly on statistical analysis of the Bank's historical "reaction function" – the "MPC-ometer" model indicates that several Committee members should already have voted to tighten, if the "old" rules still applied. (The model, however, has yet to forecast a majority vote for restriction.)

The suggested shift is also consistent with a speech by the Bank's Governor Mervyn King in January, in which he appeared to downplay the "official" inflation measure in favour of a loosely-defined core concept excluding "temporary price level factors". Core inflation, he argued, would be determined by the "output gap" and broad money growth, both of which were giving a reassuring message. (The view here is that slow M4 expansion is not disinflationary because negative real interest rates have cut the demand to hold money.)

This raises the possibility that the Bank will seek to formalise its policy shift by requesting that the new government change its remit to specify a core inflation measure as the operational target, similar to the Canadian approach. The obvious candidate measure would be the consumer price index excluding energy, food, alcohol and tobacco – this omits most of the impact of commodity price and excise duty changes (not air passenger duty) and could be further adjusted for future VAT shifts. (It does not, however, fully exclude the effect of exchange rate fluctuations, which – bizarrely – Governor King suggested should also be discounted in policy-setting.)

Against a background of likely continuing upward pressure on commodity prices and indirect taxes due to strong trend emerging-world growth and necessary fiscal retrenchment respectively, such a change would represent a de facto raising of the inflation target. Over the last five years, core consumer prices on the above definition have risen by 0.9% per annum less than the headline CPI.

A remit change is hardly likely to be resisted by politicians keen to preserve low interest rates in order to ease the perceived pain of fiscal tightening and minimise debt service costs. The possibility of such a development may partly explain the sharp rise in market inflation expectations discussed in prior posts – see the chart in Tuesday's inflation comment – and belatedly acknowledged in the April MPC minutes.