What is the RPI, CPI and CPIH? Find Out How UK Inflation is Calculated

What is the RPI?

The Retail Price Index (RPI) is a tool used in the UK to track the relative price of a basket of goods over time.

In turn, this allows us to get an accurate measure of inflation levels in the economy. The figure is tracked and released monthly by the Office for National Statistics.

What is Inflation?

Inflation is a measure of the average increase in prices over time.

What this means is that, as inflation increases, the buying power of a currency decreases and people are able to buy fewer goods and services with the same quantity of money.

Some refer to this as a loss in the purchasing power per unit of the given currency. Generally speaking, all countries experience ongoing inflation, but very few also see periods of deflation (an increase in the purchasing power of money).

What is the RPI Used For?

The RPI was first brought into use back in 1947 and for years was used as the primary method of calculating inflation in the UK.

This ended in 2003 when it was replaced by the Consumer Price Index (CPI).

However, it is still used for a few reasons such as by many employers who use it as the starting point to then carry out wage negotiations.

It is used in calculating the amount of dividends that need to be paid on certain index-linked securities, such as index-linked gilts.

Strangely enough, and to the annoyance of many, it is still used as a means to calculate rail fares across the UK.

This is despite the fact that it hasn’t been considered a National Statistic since 2013 and it consistently runs higher than CPI, encouraging ever-increasing ticketing prices for commuters.

RPI vs CPI

As mentioned, back in 2003, RPI was replaced as the measure for inflation by the CPI.

CPI only found its origins back in 1996 and was created by the EU as a means to better evaluate the financial abilities of applicant countries to join the EU.

RPI Vs CPI Inflation Graph
RPI Vs CPI – Quarterly Data

The main differences between CPI and RPI is that they each exclude certain statistics.

The RPI excludes income tax, pension charges and life insurance; whereas CPI excludes house prices, holiday spending, income tax, mortgage payments, house purchase costs, ground rent and building insurance.

Many might consider the CPI much more encompassing as it includes all UK citizens, whereas the RPI excludes around 13% of the population who are either too wealthy or are living on state benefits.

CPIH

On 31 July 2017, CPIH was officially re-designated the title of National Statistic, and this has left many wondering what it is exactly and what makes it different from CPI.

Well, CPIH stands for Consumer Price Inflation including owner occupier’s Housing costs.

The crucial difference between it and the CPI is that it includes changes in residential rents across the UK.

It doesn’t, therefore, take into account the changes in the value of UK homes, but more specifically it tracks the hypothetical amount it would cost all UK homeowners to rent their houses.

Unlike CPI, CPIH also includes for Council Tax in its calculation.

If you wish to find out more detailed statistics on the UK’s RPI, then here is a useful link that displays how the RPI has fluctuated since 1960 and whereby the base rate was set in 1987.

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Kieran Ball
Last updated: December 20th, 2017
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