Consumer Price Index (United Kingdom)
Encyclopedia
The Consumer Price Index (CPI) is the official measure of inflation of consumer prices
of the United Kingdom. It is also called the Harmonised Index of Consumer Prices (HICP).
(RPI), which was first calculated in the early 20th century to evaluate the extent to which workers were affected by price changes during the First World War. The main index was described as the Interim Index of Retail Prices from 1947 to 1955. In January 1956, it was rebased and renamed the Index of Retail Prices. In January 1962 this was replaced by the General Index of Retail Prices, which was again rebased at that time. A further rebasing occurred in January 1987, subsequent to the issue of the first index-linked gilts.
Norman Lamont, following the UK's departure from the Exchange Rate Mechanism. Initially, the target was based on the RPIX
, which is the RPI calculated excluding mortgage interest payments. This was felt to be a better measure of the effectiveness of macroeconomic policy. It was argued that if interest rates are used to curb inflation, then including mortgage payments in the inflation measure would be misleading. Until 1997, interest rates were set by the Treasury.
government handed control over interest rates to the politically-independent Bank of England
Monetary Policy Committee
. This committee is given the responsibility of adjusting interest rates in order to meet an inflation target set by the Chancellor. The initial target rate of inflation was an RPIX of 2.5%. The committee meets once per month to decide if any changes to the interest rate are necessary. If, in any month, inflation deviates from the target by more than one percentage point, the Governor of the Bank of England
is required to write an open letter to the Chancellor explaining the reasons for this and to propose a plan of action for bringing inflation back towards the target.
Since 1996, the United Kingdom has also tracked a Consumer Price Index figure, and in December 2003, the inflation target was changed to CPI of 2%, from the previous target of RPIX of 2.5%.
of prices to aggregate items at the lowest levels, instead of the arithmetic mean
. This means that the CPI will generally be lower than the RPI. The rationale is that this accounts for changes in consumer spending behaviour as a result of differences in price changes amongst products. According to the ONS, this difference is the largest contributing factor to the differences between the RPI and the CPI.
The change in the CPI over the 12 months to August 2008 was 4.7%, while the corresponding figure for RPIX (which excludes mortgage interest) was 5.2% and that for RPI (which includes mortgage interest) was 4.8%. The CPI, the RPIX, and the RPI are published monthly by the Office for National Statistics
. A history of CPI and RPIX going back to 1989 can be found at the Office for National Statistics
website.
There has been criticism of CPI as being a less effective measure of price rises than the Retail Prices Index, accusing it of being easier to manipulate and less broad based (for example excluding housing). John Redwood
, the Conservative
MP, has said that CPI targeting meant that interest rates were set lower at a time of rising (RPI) inflation.
Nevertheless, the incoming conservative chancellor George Osborne announced that CPI was to be more widely adopted, including for setting benefits and pensions.
wine and takeaway chicken
were added to the basket, whereas volume bottled cider and boxes of wine were removed. Also, organisations may justify price rises saying they are "below the rate of inflation"
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
of the United Kingdom. It is also called the Harmonised Index of Consumer Prices (HICP).
History
The traditional measure of inflation in the UK for many years was the Retail Prices IndexRetail Prices Index (United Kingdom)
In the United Kingdom, the Retail Prices Index or Retail Price Index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services.-History:...
(RPI), which was first calculated in the early 20th century to evaluate the extent to which workers were affected by price changes during the First World War. The main index was described as the Interim Index of Retail Prices from 1947 to 1955. In January 1956, it was rebased and renamed the Index of Retail Prices. In January 1962 this was replaced by the General Index of Retail Prices, which was again rebased at that time. A further rebasing occurred in January 1987, subsequent to the issue of the first index-linked gilts.
RPIX
An explicit inflation target was first set in October 1992 by Chancellor of the ExchequerChancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
Norman Lamont, following the UK's departure from the Exchange Rate Mechanism. Initially, the target was based on the RPIX
RPIX
RPIX is a measure of inflation in the United Kingdom, equivalent to the all items Retail Price Index excluding mortgage interest payments.-History:It was the UK's target rate of inflation from October 1992 to December 2003...
, which is the RPI calculated excluding mortgage interest payments. This was felt to be a better measure of the effectiveness of macroeconomic policy. It was argued that if interest rates are used to curb inflation, then including mortgage payments in the inflation measure would be misleading. Until 1997, interest rates were set by the Treasury.
Introducing CPI
On election in May 1997, the new LabourLabour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
government handed control over interest rates to the politically-independent Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
Monetary Policy Committee
Monetary Policy Committee
The Monetary Policy Committee is a committee of the Bank of England, which meets for two and a half days every month to decide the official interest rate in the United Kingdom . It is also responsible for directing other aspects of the government's monetary policy framework, such as quantitative...
. This committee is given the responsibility of adjusting interest rates in order to meet an inflation target set by the Chancellor. The initial target rate of inflation was an RPIX of 2.5%. The committee meets once per month to decide if any changes to the interest rate are necessary. If, in any month, inflation deviates from the target by more than one percentage point, the Governor of the Bank of England
Governor of the Bank of England
The Governor of the Bank of England is the most senior position in the Bank of England. It is nominally a civil service post, but the appointment tends to be from within the Bank, with the incumbent grooming his or her successor...
is required to write an open letter to the Chancellor explaining the reasons for this and to propose a plan of action for bringing inflation back towards the target.
Since 1996, the United Kingdom has also tracked a Consumer Price Index figure, and in December 2003, the inflation target was changed to CPI of 2%, from the previous target of RPIX of 2.5%.
Implementation
The CPI calculates the average price increase as a percentage for a basket of 600 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets. Note that unlike the RPI, the CPI takes the geometric meanGeometric mean
The geometric mean, in mathematics, is a type of mean or average, which indicates the central tendency or typical value of a set of numbers. It is similar to the arithmetic mean, except that the numbers are multiplied and then the nth root of the resulting product is taken.For instance, the...
of prices to aggregate items at the lowest levels, instead of the arithmetic mean
Arithmetic mean
In mathematics and statistics, the arithmetic mean, often referred to as simply the mean or average when the context is clear, is a method to derive the central tendency of a sample space...
. This means that the CPI will generally be lower than the RPI. The rationale is that this accounts for changes in consumer spending behaviour as a result of differences in price changes amongst products. According to the ONS, this difference is the largest contributing factor to the differences between the RPI and the CPI.
The change in the CPI over the 12 months to August 2008 was 4.7%, while the corresponding figure for RPIX (which excludes mortgage interest) was 5.2% and that for RPI (which includes mortgage interest) was 4.8%. The CPI, the RPIX, and the RPI are published monthly by the Office for National Statistics
Office for National Statistics
The Office for National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to the Parliament of the United Kingdom.- Overview :...
. A history of CPI and RPIX going back to 1989 can be found at the Office for National Statistics
Office for National Statistics
The Office for National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to the Parliament of the United Kingdom.- Overview :...
website.
There has been criticism of CPI as being a less effective measure of price rises than the Retail Prices Index, accusing it of being easier to manipulate and less broad based (for example excluding housing). John Redwood
John Redwood
John Alan Redwood is a British Conservative Party politician and Member of Parliament for Wokingham. He was formerly Secretary of State for Wales in Prime Minister John Major's Cabinet and was an unsuccessful challenger for the leadership of the Conservative Party in 1995...
, the Conservative
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
MP, has said that CPI targeting meant that interest rates were set lower at a time of rising (RPI) inflation.
Nevertheless, the incoming conservative chancellor George Osborne announced that CPI was to be more widely adopted, including for setting benefits and pensions.
Side-effects of CPI
The basket of goods and services chosen reflects, as an unintended consequence, changes in society's buying habits. For example, on 23 March 2009, roséRosé
A rosé is a type of wine that has some of the color typical of a red wine, but only enough to turn it pink. The pink color can range from a pale orange to a vivid near-purple, depending on the grapes and wine making techniques.- Production techniques :There are three major ways to produce rosé...
wine and takeaway chicken
Fried chicken
Fried chicken is a dish consisting of chicken pieces usually from broiler chickens which have been floured or battered and then pan fried, deep fried, or pressure fried. The breading adds a crisp coating or crust to the exterior...
were added to the basket, whereas volume bottled cider and boxes of wine were removed. Also, organisations may justify price rises saying they are "below the rate of inflation"