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What is the Retail Price Index (RPI)

What is the Retail Price Index (RPI)

Retail Price Index

In the UK, the Retail Price Index or Retail Price Index (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services. As the RPI did not meet international statistical standards, since 2013, the Office for National Statistics no longer classifies it as a “national statistic,” emphasizing the consumer price index instead. However, as of 2018, the UK Treasury still uses the RPI measure of inflation for various index-linked tax increases.

History

The RPI was first calculated for June 1947, largely replacing the previous provisional retail price index. It was once the primary official measure of inflation. In that sense, the Consumer Price Index (CPI) replaced it. The government still uses the RPI as the basis for various purposes, such as amounts payable on index-linked securities, including index-linked gilts, and rental increases for social housing. Many employers also use it as a starting point in salary negotiation. Since 2003, it is no longer used by the government for inflation, targeting the Bank of England’s Monetary Policy Committee nor, since April 2011, as the basis for indexing former public sector employees’ pensions. As of 2016, the UK state pension index according to the highest increase in median income, the CPI or 2.5% (“the triple lock”).

Comparison of 3 inflation indices, based on 1988 as 100

The retail price index, RPIX, and CPI with the average earnings index also included the three indices’ annual variation rate shows the volatility of the RPI measure, which is one of its disadvantages. The UK RPI works as follows: They choose a base year or starting point. It becomes the standard to measure the price. They make a list of items purchased by an average family. A set of weights calculates the relative importance of things in the average family budget. The higher the average household bill’s proportion, the greater the value. They multiply the price of each item by the weight given to the article so that the contribution of the item’s price is proportional to its importance. Each item’s price must be present in both the base year and the comparison year (or month). It allows calculating the percentage change over the desired period. The RPI calculation uses a variation of the Carli method instead of the Jevons method to calculate the RPIJ and the CPI. The unweighted Carli method overstates inflation rates. However, as noted above, the RPI calculation uses weights, which eliminate this exaggeration.

Consumer Price Index

The Consumer Price Index that includes owner-occupant housing costs (CPIH) is the most comprehensive inflation measure. Extends the (CPI) to measure the costs of owning, maintaining, and living in one’s home, known as owner-occupiers. The CPI is usually lower,  due to differences in the calculation formulas of the indices than to differences in coverage. In the June 2010 budget, the UK government announced to use CPI instead of the RPI to increase the rating of some benefits from April 2011. About state pensions, the UK government confirmed in their statement in fall 2011 that these would rise by the highest value of CPI, median income or 2.5%. The RPI change variability due to fluctuations in mortgage interest rates is present in the right graph. It was one of the arguments used in favor of switching to RPIX.

Variations

Variations in the RPI include the RPIX. It eliminates the cost of mortgage interest payments, the RPIY, which excludes indirect taxes (VAT) and local authority taxes. As well as mortgage interest payments, and the RPIJ.

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