What Is the Retail Price Index (RPI)?
Let me explain the Retail Price Index, or RPI, directly to you. It's a legacy measure of inflation in the UK, established back in 1947 and put into practice in 1956. In 2003, it got replaced as the official inflation measure by the Consumer Prices Index, known as CPI. Even so, people still refer to RPI for things like wage negotiations, changes in tax allowances, and adjustments to social housing rents. While it's no longer the official statistic, RPI holds influence in certain economic sectors.
Key Takeaways on RPI
Here's what you need to know about RPI: it measures consumer inflation in the UK but isn't the official statistic anymore; instead, it's used for specific calculations in wage negotiations and cost escalations. As an older measure from 1947, RPI is still published, but its calculation hasn't been updated or corrected, which is why it's called a legacy measure. The CPI took over as the primary inflation measure in 2003 because it offers more comprehensive coverage and updated methods. Differences between RPI and CPI come from including different goods and services, plus varying calculation techniques that affect the reported inflation rates. Importantly, RPI still impacts financial areas like tax allowances, social housing rents, and index-linked securities, showing its lasting role in the economy.
How RPI Measures Inflation in the UK
RPI was first calculated in June 1947 and became the UK's main inflation measure, replacing the old Cost of Living Index. It served as the primary tool until 2003, when CPI replaced it to set the inflation target for the Bank of England's Monetary Policy Committee. In 2013, the Office for National Statistics reclassified RPI as not a national statistic, but they still include it on their website alongside other indexes. Remember, the rate of inflation is simply the change in prices for goods and services over time—that's the core of what RPI tracks.
Practical Applications of the RPI
- Cost of living and wage escalation
- Tax allowances on index-linked securities
- Social housing rent increases
- Wage rates during employment negotiations
Comparing RPI and CPI: Key Differences
When you compare RPI and CPI, note that RPI tracks the cost of a fixed basket of goods using about 180,000 price quotes for 700 items. CPI started in 1996 as the Harmonised Index of Consumer Prices (HICP), developed to unify statistics across EU economies after the 1992 Economic and Monetary Union. Since CPI's introduction, UK 12-month inflation has generally been higher when measured by RPI compared to CPI. This difference stems from RPI including items that CPI excludes, and vice versa; plus, they target different populations and use different formulas, creating what's called the formula effect.
Why Is the RPI Considered a Legacy Measurement?
Over time, the RPI's calculation hasn't been updated or corrected to accurately measure inflation. That's why the UK Statistics Authority labels it a legacy measure and only publishes it because they're required to do so.
What Is Included in the CPI?
CPI covers all spending by private and institutional households, as well as foreign nationals visiting the United Kingdom.
An Example of RPI vs. CPI
To illustrate the differences, consider that varying inputs lead to significantly different inflation rates. For instance, in May 2023, CPI stood at 8.7%, while RPI was at 11.4%. The UK's ONS lists RPI as not a national statistic.
The Bottom Line
In summary, RPI is one of two consumer inflation measures from the UK's Office for National Statistics. Introduced in 1947, it was the main measure initially but is now seen as legacy due to its outdated method. CPI replaced it in 2003. Today, RPI has limited uses but the UK government keeps publishing it.
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