Discover the Retail Price Index (RPI)
The Retail Price Index (RPI) is a crucial measure of consumer inflation crafted by the United Kingdom’s Office for National Statistics (ONS). Though not the official inflation statistic, the RPI provides essential data on specific types of cost escalation. Originating in 1947 and officially implemented in 1956, the RPI has been instrumental in understanding price changes over time.
Key Takeaways
- The Retail Price Index (RPI) is calculated and released by the Office of National Statistics in the United Kingdom.
- Despite its historical significance, the RPI is not the official inflation rate statistic for the U.K.
- The RPI remains relevant in government transfer payments, wage contract negotiations, and other areas involving cost escalation.
RPI and Its Relationship with UK Inflation
First calculated in June 1947, the RPI was initially the preeminent measure of inflation, supplanting the older Cost of Living Index. However, in 2003, the Consumer Prices Index (CPI) took over as the primary inflation metric for setting targets by the Bank of England’s Monetary Policy Committee. Interestingly, despite its reclassification in 2013 as ’not a national statistic,’ the RPI continues to feature on the ONS website.
Using the RPI
While the RPI isn’t the official statistic, it remains critical for:
- Determining cost of living adjustments and wage escalations.
- Setting tax allowances on index-linked securities.
- Calculating social housing rent increments.
- Negotiating wage rates during employment discussions.
RPI vs. CPI: A Comparative Analysis
The RPI monitors changes in the cost of a fixed assortment of goods, combining approximately 180,000 price quotes from around 700 representative items. On the other hand, the CPI began in 1996 as the Harmonised Index of Consumer Prices (HICP), to standardize inflation measurement across EU economies. Since its inception, CPI has almost always had different inflation rates compared to RPI because of variations in the goods and services included and differences in their calculation formulas. This disparity is known as the ‘formula effect.’
Why RPI Is Seen as a Historical Measure
Due to a lack of updates or necessary corrections, RPI is viewed as a ’legacy measure.’ The U.K. Statistics Authority maintains and publishes it because of obligatory reasons rather than precision or relevance.
A Closer Look at CPI
The CPI encompasses spending by both private and institutional households as well as foreign nationals visiting the United Kingdom.
Example: RPI vs. CPI Scenario
Consider the inflation calculations for May 2023: The CPI recorded an 8.7% increase, while the RPI noted an 11.4% rise. Such differences highlight the significant variability in inputs for these indexes.
Summary
The Retail Price Index (RPI), though calculated and published by the Office of National Statistics in the United Kingdom, has been largely replaced by the Consumer Prices Index (CPI) for measuring inflation. With the RPI considered a legacy measure, its recalculations and updates are now obsolete, though it still plays a role in various sectors and continues to be posted on the ONS website.
Related Terms: Consumer Price Index, Cost of Living, Inflation Rate, Price Change.
References
- Office of National Statistics. “Inflation and Price Indices”.
- Thomson Reuters. “Retail Price Index (RPI)”.
- U.K. Parliament. “Measuring Inflation Contents”.
- U.K. Parliament. “Criticism of the Retail Prices Index”.
