Definition of retail price index
The retail price index (RPI) and the consumer price index (CPI) are both measures of the price of goods and services in the UK. The UK government’s stated policy is to use the consumer price index (CPI) for the indexation of benefits, tax credits and public service pensions, whereas it would use the retail price index (RPI) for the uprating of index-link gilts and revalorisation of excise duties.
The retail price index, or the RPI, shows the changes in the cost of living. It reflects the movement of prices in a range of goods and services used regularly, such as food, heating, housing, household goods, bus fares and petrol. Items considered most important to us, such as housing and food, are given a higher weighting in the overall index, while items, such as tobacco, are given a lower weighting. The RPI is inclusive of VAT, and other taxes, and as such can change as a result of changes in taxation levels. RPI includes some components that are not included in CPI such as some elements of owner-occupied housing, such as mortgage interest payments.
Example of retail price index (RPI) in use
Measures of inflation are vital tools for economists, business and government. The Bank of England’s Monetary Policy Committee sets UK interest rates on the basis of a target figure for inflation set by the Chancellor of the Exchequer. This was RPIX (all items of RPI excluding mortgage interest payments) until it was switched to CPI in 2003.
Retail price index (RPI) in the news
In January 2013, the UK government decided not to change the way it calculated RPI despite a persistent formula effect which it felt was making RPI overstate inflation. It was felt proposed change would bring UK calculations more in line with international standards. But the Office of National Statistics reacted to fears that suddenly lowering RPI would not please users of the index who stated they they valued consistency. This decision hurt taxpayers, drivers and students and benefited those with private pensions still linked to the RPI and anyone invested in the near £300bn index-link government bond market.