Price Indices - RPI and CPI

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

The Retail Price Index (RPI) measures inflation, tracking how prices change over time by comparing prices of a standard ‘basket’ of goods and services including food, fuel, clothes and housing. The basket is updated each February to reflect what people actually buy. 

Expressed as a percentage, it’s calculated monthly. If the goods cost £100 last year and £103 this year then the RPI is 3%. 

It’s used in wage negotiations, to calculate index-linked gilts, student loan interest calculations, and some pension, rail fare and social housing rent increases.

The RPIX is the same but excludes mortgage interest payments. Since mortgage rates rise when the Bank of England increases interest rates to control inflation, including them would make inflation appear higher precisely when the BoE is already taking action to reduce it. Excluding mortgage interest gives a clearer picture of underlying inflation.

The CPI (Consumer Prices Index) and CPIH (CPI plus housing costs), introduced to standardise with European measures, are now preferred by the government. These also compare a basket of goods, but the basket reflects a wider range of people (rural as well as urban, for example) and use different statistical methods.

Love Eleanor. xxx