Inflation is a slippery beast to measure. Prices move all the time, but a generalised change in the level of prices is something else again. This week’s Inflation Report from the Bank of England is likely to repeat the slightly smug tone of the recent ones, as the Consumer Price Index, its preferred measure, remains subdued.

Yet something is stirring. Andy Haldane, the rising star who is the BoE’s chief economist, is musing about moving the official measure to CPIH, a kind of CPI with knobs on, to try and reflect the sort of inflation that home-owners enjoy, and which causes misery to everyone else. The CPIH already exists in the bowels of the Office for National Statistics, and tracks back to 2006. More surprisingly, the two indices have hardly diverged over the seven years.

This statistic is likely to produce a hollow laugh from anyone trying to live inside London. Houses in other places, where fewer people want to live, may be below their 2007 peak, and mortgage costs are undeniably lower, but the story in the capital is of brutal unaffordability.

This mismatch seems to be a direct result of the CSO’s methodology. The statisticians have decided not to try and measure the cost of home ownership, citing the “practical difficulties” in measuring it. So they’ve taken the “rental equivalence” as a proxy. This will hardly do, since it skews the sample dramatically towards smaller flats, even if the CSO can discover a clean clearing price for rented homes.

As a result, CPIH would be no more satisfactory measure of the reality of living in London than the plain CPI. Still, it’s what we may have if Mr Haldane gets his way. We used to have another yardstick which was generally accepted as a fair measure of the slippery beast until it was scorned to oblivion by the statisticians. It was the Retail Prices Index.

Challenging times

Do you really want to own more bank shares? After the capital meltdown of such supposedly solid investments as Lloyds or Barclays, not to mention Royal Bank of Scotland or HBoS, you’d have thought sensible investors might say never again.

You’d be wrong. On top of further sales from the government’s rescue portfolio, we’re to be treated to a £10bn cascade of new bank share offerings in the next year or two. These range from known names like TSB and Santander UK to obscure tiddlers like OneSavings and Metro. Lumped together, they’re called “challenger banks”, perhaps to distinguish them from the highly challenged banks that we know and don’t love.

However, it’s going to be challenging for the challengers to make money. They all want to be nice to customers, to support British borrowers (no price gouging small businesses) and to eschew cross-selling useless insurance policies. Unfortunately, this basic banking isn’t very profitable, which is why we got the idiocy of PPI in the first place. Increasing demands from regulators for more capital are further eroding margins.

The big banks are responding by closing those expensive branches, and anyone tempted to buy shares in the newcomers might ask what they can offer customers in an age of the ATM and rapidly-evolving technology for money transfer. It’s surely a sign of advancing civilisation when a bank branch becomes a restaurant, but it’s seldom a sign that the shareholders are doing well.

Not so rare

Little more than a year ago, the US congress got itself into such a lather about a clutch of obscure minerals that it proposed passing legislation to oblige the government to stockpile them. China, they argued, had a stranglehold on the exotic family of metals called rare earths, without which mobiles and missiles can’t function, so something had to be done.

Fortunately, nothing was. Since the scare, the prices of the likes of cerium oxide have collapsed, almost bankrupting Lynas Corporation, an Australian producer. If China is forced to lift export restrictions to comply with World Trade Organisation rules, rare earths may become rather common earths. Which only goes to demonstrate the iron (sorry) law of commodities: today’s shortage is tomorrow’s glut.

This is my updated FT column from Saturday

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