DO YOU KNOW your RPI from your RPIX or, indeed, your HICP? Perhaps not, but as dull as these initials sound, they could soon make a big difference to your mortgage rate, taxes and annual pay rise.

The Chancellor announced this week that the Bank of England will set interest rates to hit a target based on Europe’s harmonised inflation measure. The announcement came as part of Gordon Brown’s verdict of the five euro entry tests.

Enter HICP, the European-style harmonised index of consumer prices, known as “Hiccup” to friends, and exit — or RIP— the RPIX, the rate of inflation excluding mortgages — the measure now used by the Bank in its rate deliberations.

The key difference between the two measures is that the RPIX includes house prices, while the HICP does not. The basket of goods used to calculate the two measures has a number of other differences including student accommodation costs and stockbrokers’ charges. The RPIX takes a simple arithmetic mean of prices, while the HICP uses a more sophisticated geometric average.

Individual eurozone countries have some a degree of leeway in the calculation to allow them to account for different patterns of national spending.

When HICP makes its debut in November this year, there will be another big change. Mr Brown has told the Bank that it must lower its inflation target from 2.5 per cent to 2 per cent. However, this new target should not prove a problem because UK inflation measured by HICP is running at 1.5 per cent; RPIX is at 3 per cent.

Treasury officials attempted this week to downplay the importance of moving to HICP. However, although the target for inflation is lower, the measurement differences for HICP mean that this could still allow a slightly less tough regime — and perhaps lower rates. When the Bank of England shifts from RPIX to HICP in November, some analysts say that there should be an immediate half percentage point base rate cut. But most economic commentators believe that the Bank would be more subtle in its response and any immediate rate cut is unlikely.

The Treasury insists that the new lower inflation gauge will not be used for the annual indexing of tax allowances — something that would imply a stealthy tax rise.

Each year the personal allowance, the level of income at which we start to pay income tax, should be uprated in line with inflation, although Mr Brown this year chose to freeze the threshold at its 2002-03 level of £4,615. (As a result we are all paying an extra £30 in tax — an early indicator of what cynics think life could be like under HICP).

The rate of inflation is also used to set the annual rise in the basic state pension and benefit payments. But the Chancellor has promised benefits rises will still be based on the RPI.

Millions of employees are accustomed to inflation-linked annual pay rises. They should prepare for disappointment if the lower HICP measure ends up as the benchmark for deals.