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Retail Prices Index (United Kingdom)

Retail Prices Index (United Kingdom)

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In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, the Retail Prices Index or Retail Price Index (RPI) is a measure of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 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 :...

. It measures the change in the cost of a basket of retail goods and services.

History


RPI was first calculated for June 1947. It was once the principal official measure of inflation. Although it has been superseded in that regard by the Consumer Price Index
Consumer Price Index (United Kingdom)
The Consumer Price Index is the official measure of inflation of consumer prices of the United Kingdom. It is also called the Harmonised Index of Consumer Prices .-History:...

 (CPI), it is still regularly quoted by the UK news media.

The RPI is still used by the government as a base for various purposes, such as the amounts payable on index-linked securities including index-linked gilts, and social housing rent increases. Many employers also use it as a starting point in wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

 negotiation. It is no longer used by the government as the basis for the indexation of the pensions of its former employees.

In March 2009, the change in RPI measured over a 12-month period turned negative, indicating an overall annual reduction in prices, for the first time since 1960. The change in RPI in the 12 months ending in April 2009, at -1.2%, was the lowest since records began in 1948.

Housing association
Housing association
Housing associations in the United Kingdom are independent not-for-profit bodies that provide low-cost "social housing" for people in housing need. Any trading surplus is used to maintain existing homes and to help finance new ones...

s lobbied the government to allow them to freeze rents at current levels rather than reduce them in line with the RPI, but the Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...

 concluded that rents should follow RPI down as far as -2%, leading to savings in housing benefit
Housing Benefit
Housing Benefit is a means tested social security benefit in the UK that is intended to help meet Housing costs for rented accommodation. The primary legislation governing Housing Benefit is the Social Security Contributions and Benefits Act 1992. Operationally, the governing Regulations are...

.

In February 2011, the RPI jumped to 5.1% putting pressure on the Bank of England to raise interest rates despite disappointing projected GDP growth of only 1.6% in 2011. The September 2011 figure of 5.6%, the highest for twenty years, was described by the Daily Telegraph as "shockingly bad".

Calculation


The United Kingdom RPI is constructed as follows:
  1. A base year or starting point is chosen. This becomes the standard against which price changes are measured.
  2. A list of items bought by an average family is drawn up. This is facilitated by the Living Costs and Food Survey
    Living Costs and Food Survey
    The Living Costs and Food Survey is a survey carried out in the United Kingdom by the Office for National Statistics . It is carried out on a calendar year basis and collects information on expenditure of goods and services for private households...

    .
  3. A set of weights are calculated, showing the relative importance of the items in the average family budget - the greater the share of the average household bill, the greater the weight.
  4. The price of each item is multiplied by the weight, adjusting the item's size in proportion to its importance.
  5. The price of each item must be found in both the base year and the year of comparison (or month).


This enables the percentage change to be calculated over the desired time period.

In practice the comparison is made over shorter periods, and the weights are frequently reassessed. Detailed information is published on the Office of National Statistics website.

The following items are not included in the CPI: Council tax
Council tax
Council Tax is the system of local taxation used in England, Scotland and Wales to part fund the services provided by local government in each country. It was introduced in 1993 by the Local Government Finance Act 1992, as a successor to the unpopular Community Charge...

, mortgage interest payments, house depreciation, buildings insurance, ground rent, solar PV feed in tariffs and other house purchase cost such as estate agents' and conveyancing fees.

CPI is usually lower as a result. The UK Government announced in the June 2010 budget
June 2010 United Kingdom Budget
The June 2010 United Kingdom Budget, officially known as 2010 Budget - Responsibility, freedom, fairness: a five year plan to re-build the economy, was delivered by George Osborne, Chancellor of the Exchequer, to the House of Commons in his budget speech that commenced at about 12.30 p.m on Tuesday...

 that CPI would be used in place of RPI for uprating of state pensions and other benefits with effect from April 2011.

The variability of the change in RPI is shown in the graph on the right. This was one of the arguments used in favour of changing to RPIX.

Variations


Variations on the RPI include 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 removes the cost of mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

 interest payments, and the RPIY, which excludes indirect taxes (VAT
Vat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...

) and local authority taxes as well as mortgage interest payments.

See also

  • Consumer price index
    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...

     (general concept)
  • Price index
    Price index
    A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...

    (more detailed statistical explanation)

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