The main inflation rate in the UK is now the CPI Consumer Price Index.
The CPI is based on the HCIP (Harmonised Consumer index prices) which measures inflation on internationally agreed standards throughout Europe.
•The RPI (Retail price index) includes mortgage interest payments. Thus changes in the interest rates effect the RPI. If interest rates are cut, it will reduce mortgage interest payments. Thus the RPI will fall but not the CPI.
•The RPI also includes council tax and some other housing costs not included in CPI
•The CPI includes some financial services not included in the RPI
•The CPI is based on a wider sample of the population for working out weights.
Definition of Deflation
Deflation is a fall in the price level of the economy. It means there will be a negative inflation rate.
CPI and RPI Measures of Inflation
RPI - retail price index includes mortgage interest payments and so tends to be more volatile. A cut in interest rates will reduce RPI
CPI - Consumer Price Index excludes mortgage interest payments
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