August 20, 2014

CPI and RPI explained

The two main inflation measures used in the UK are the Consumer Prices Index (CPI) and Retail Prices Index (RPI). Estimations of inflation produced by the measures will vary simply because there are some differences in the methodology as well as the products and services accounted for. With that said there are both similarities as well as differences:

Similarities between CPI and RPI

The methodology of the CPI and RPI measures of inflation can be similar:

  • Both have the aim of measuring the changes in the cost of buying a ‘basket’ of products and services within the UK
  • The methodology is quite similar. They both select a range of products and services to monitor the prices of. These prices are then checked for increases.
  • Products and services measured will vary in line with consumer trends. These goods are also weighted depending on their demand within the economy.

Differences between CPI and RPI

  • RPI does not cover all the same items as CPI. For example, CPI includes items such as charges for financial services which the RPI does not include. Likewise, the CPI does not include charges for mortgage interest payments and other housing costs.
  • Differences in mathematical modelling techniques also result in CPI usually showing a lower inflation rate than RPI.

CPI is the measure which has been adopted by the British Government for its UK inflation target. It is required to achieve a target of 2 percent by the Bank of England’s monetary policy.