You can rely on Goodhart's Law

In late 2003, when Gordon Brown changed the measure of inflation that the Bank of England uses to make interest rate decisions, the ostensible reason was to bring the UK into line with the rest of Europe.

Privately, however, the chancellor's aides stressed that the new target based on the Consumer Prices Index would be a little softer than the old measure - the Retail Prices Index excluding mortgage interest payments - and would thus mean that monetary policy would be a bit looser.

As Professor Peter Spencer points out in today's Ernst & Young Item Club forecast, what the Treasury was forgetting in its enthusiasm was the perversity of Goodhart's Law. This law states that any indicator will start to misbehave as soon as it is adopted as an official target. As Spencer notes, the law has been amply proved true in this case. The RPIX measure of inflation has come down as house price inflation has receded, but the CPI, which excludes all housing costs, has proved much more sensitive to rising energy prices.

The result is that RPIX is below its old 2.5% target and would present no barrier to lower interest rates were it still being targeted. The CPI, on the other hand, may hit 2.7% or 2.8% tomorrow - that is well above its 2% target and beginning to get close to the level where Mervyn King would need to write a letter to Mr Brown explaining just what the Bank was up to.

Will the Bank be less likely to ease policy in those circumstances? You bet.