Overview
The Retail Prices Index (RPI) is a statistical measure used in the United Kingdom to track the average change over time in the prices of goods and services purchased by consumers. It is one of the oldest measures of inflation and is often used as a benchmark for wage negotiations and index-linked financial products.
Key Concepts
The RPI is calculated by taking a survey of prices for a wide range of items, forming a ‘basket’ of goods and services. This basket is updated periodically to reflect changing consumption patterns. The prices of these items are then weighted according to their importance in average household expenditure.
- Basket of Goods: A representative selection of items bought by typical households.
- Weighting: Assigning importance to each item based on its share of total expenditure.
- Inflation Measurement: Calculating the percentage change in the total cost of the basket over time.
Deep Dive
Unlike some other inflation measures, the RPI includes housing costs such as mortgage interest payments and council tax. This distinction is significant, as it can lead to a higher RPI figure compared to measures like the Consumer Prices Index (CPI), which excludes these items. The methodology involves collecting prices from thousands of retail outlets across the UK.
Applications
RPI has historically been used for:
- Setting pension increases.
- Adjusting benefit payments.
- Determining the interest rates on some savings bonds and government gilts.
- Contractual price escalations in commercial agreements.
Challenges & Misconceptions
A common misconception is that RPI is the primary measure of inflation for the UK. While historically significant, the Consumer Prices Index (CPI) is now the target for monetary policy. RPI is considered less representative of modern consumption and has some methodological criticisms, leading to its gradual phasing out for certain official purposes.
FAQs
What is the difference between RPI and CPI?
RPI includes mortgage interest payments and council tax, while CPI does not. CPI is the government’s preferred measure of inflation.
Why is RPI still calculated?
It continues to be used for specific index-linked financial products and contracts where its inclusion is legally or contractually binding.