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RPI versus CPI

An economic perspective

27 June 2017

 Inflation is the tendency for prices to rise over time.
 The inflation rate measures the pace at which prices rise.
 It is calculated by looking at changes in the individual prices of a sample of goods
and services: ‘the basket of goods’.
 Different measures of inflation include different sets of goods and different
approaches to aggregating individual price movements into a headline inflation

Source: Aylward (2016), KPMG.
Inflation and the cost of living

 Inflation rates measure changes in prices, not in the cost of living.
 Cost of living is an ‘ill defined’ concept (ONS, 2014).
 Changing the basket of goods underpinning inflation rates will not directly impact the
inflation rate.
 Changing perceptions about what constitutes a ‘basic’, ‘minimum’ or ‘constant’
standard of living will affect the perceived cost of living.
 The cost of living is measured in currency, whereas inflation is measured in percent.
 Increases in cost of living may be higher or lower than the inflation rate.

Source: Aylward (2016), KPMG.
RPI and CPI: different histories

 RPI descends from the ‘Cost of Living Index’, first published in 1914.
 Significant changes were made following the Second World War, and the modern
RPI was first published in 1956.
 CPI was introduced in 1997, as the EU established a consistent approach to
measuring inflation: the Harmonised Index of Consumer Prices.
 CPI was adopted by Bank of England in 2003, and by the Government for the
indexation of benefits, tax credits and public sector pensions in 2010.
 RPI stripped of National Statistic Status in 2013.

Source: Aylward (2016), KPMG.
RPI and CPI: different people

 The CPI basket is based upon consumption recorded in the National
Accounts, and therefore includes:
 spending in the UK by foreign visitors;
 institutional households, such as university halls and hospitals; and
 the entire income distribution.
 Weights are updated in two stages in January and February each year.
 The RPI basket is based on the Living Costs and Foods Survey, and
 the top 4% of the income distribution; and
 households dependent upon state pensions.
 Weights are updated in January each year.

Source: Aylward (2016), KPMG.
RPI and CPI: different goods

 Besides the different weights (resulting from different representative
consumers), RPI and CPI cover different items.
 RPI includes a number of housing costs, including mortgage
repayments and council tax.
 RPIX is the equivalent with these excluded.
 CPIH includes Owner Occupier Housing costs.
 CPI includes university accommodation fees and foreign student
tuition fees.
 RPI only includes second hand cars.

Source: Aylward (2016), KPMG.
RPI and CPI: different formulae

 At the lowest level of aggregation, the two indices use different
approaches to averaging changes in prices of individual goods:
 RPI is based on the Carli approach, which uses an arithmetic average; whereas
 CPI is based on the Jevons approach, which uses a geometric average.
 An arithmetic average of price changes will always be higher than a
geometric average of the same price changes.
 Neither Carli (arithmetic) nor Jevons (geometric) is necessarily ‘correct’ for
a comparison of prices between two periods.
 However, when weights are recalculated, indices must be ‘chain linked,’
which can lead to inconsistencies between reported inflation and
underlying price movements with the Carli approach.

Source: Aylward (2016), KPMG.
RPI and CPI: different numbers

CPI and RPI, January 1989 = 100
RPI has been 0.7
percentage points higher, on 260

average, since 1989 than
the CPI, making a 240

cumulative difference of
nearly 20%. 220

The formula effect was 200

estimated at around 0.5
percentage points until 180

2010, but since increased.

The Bank of England
currently assumes it is 0.9 140

percentage points. CPI


1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: ONS

Source: Aylward (2016), KPMG.
RPI and CPI: which is better?

Index Advantages Disadvantages
RPI  Based upon household data.  Not a cost of living measure.
 Well recognised.  Excludes some pensioners.
 Uses Carli.
 Not a national statistic.

CPI  Uses Jevons.  Not a cost of living measure.
 Includes all pensioner  Includes university accommodation
households. fees, foreign student university tuition
 Meets international standards. fees and stockbroker fees.
 Includes foreign visitors.
 Includes institutional households and
the very rich.

Source: Aylward (2016), KPMG.


• Housing costs account for 10% of household expenditure
• From March this year, the ONS has published CPI-H as its headline rate of inflation.
• CPI-H is based on rental equivalence – the price you would have to pay to rent your
own house

 Differences in baskets of goods do not definitively favour RPI or CPI.
 From a mathematical perspective, it has become very difficult to argue in favour of
a Carli based approach.
 National Statistician: “Put simply, I believe that the RPI is not a good measure of
inflation and does not realistically have the potential to become one. I strongly
discourage the use of RPI for as a measure of inflation as there are far superior

Source: Aylward (2016), KPMG.
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