Unit 2: CPI Vs RPI - What are the differences?

How are they calculated?


Both the CPI and RPI are an attempt to measure the changes in the cost of buying a representative basket of UK goods and services.

The methods used to calculate both indexes are similar. Each month thousands of prices for a selection of goods and services are analysed to check on any increases.

Some of the goods and services will carry a higher weighting, reflecting the fact that we spend more on some items than others.

Each year, the make-up of the "basket" of good and services, and the weightings assigned to them, are revised to take into account changes in spending patterns.

For example, in recent years people have tended to spend more of their money on electrical goods, travel and leisure, while the proportion they have spent on basic items such as food has fallen.

So why do the CPI and RPI values differ?

Not all the items covered by the RPI are included in the CPI measure.

For example, the CPI does not include Council Tax, mortgage interest payments and some other housing costs.

The CPI measure also includes some items - such as charges for financial services - which are not in the RPI.

Another difference is that the CPI measure covers a broader sample of the population in its calculations than RPI.

There is also a difference in the mathematical methods used to calculate the price changes which, the Office for National Statistics says, means that in practice the CPI always shows a lower inflation rate than the RPI rate for given price data.

Why does the government target the CPI rate?

Until 2003, the government targeted a rate of inflation known as RPIX - which, unlike the RPI measure, excludes mortgage interest payments.

However, in his pre-Budget speech in December 2003, Chancellor Gordon Brown said the inflation target would be switched to the CPI measure with immediate effect.

The government cited three reasons why CPI was a better measure for the purposes of setting monetary policy:

•it gives a more realistic characterisation of consumer behaviour

•it gives a better picture of spending patterns in the UK

•it is a more comparable measure of inflation internationally and represents international best practice

The government's current target for CPI is 2%, which the Bank of England is tasked with hitting.

If the rate moves by more than one percentage point either way - that is, it breaks out of the range 1-3% - the governor of the Bank of England must write to the chancellor to explain why.