Inflation is a topical issue because UK consumer price inflation has risen sharply in recent months, driven by a broad range of items, with particular pressure coming from food, durables, consumer goods and energy.
There are two primary measures of inflation: the consumer price index (CPI) and the retail pricing index (RPI). However, what exactly is the difference, and why’s it important to understand?
Retail Prices Index (RPI)
Inflation is measured by the Retail Prices Index (RPI), which includes the cost of housing (such as property tax and mortgage interest). As you may remember from secondary school maths, the arithmetic mean is calculated by adding up the prices of everything and then dividing by the total number of things in the set.
Here’s a list of items that are linked to RPI:
- Final salary pension payments.
- Income from index-linked annuities.
- Income from some index-linked bonds.
- Train tickets.
- Mobile phone tariffs.
- Air Passenger Duty.
- Car tax.
- Tobacco duty.
- Alcohol duty.
- Interest on student loans.
Consumer Prices Index (CPI)
The cost of housing is left out of the calculation for the Consumer Price Index (CPI), which measures hundreds of other products that we spend money on daily. The rate of inflation is then calculated using a geometric mean, which involves multiplying all the prices by n and then taking the nth root of that product, where n is the total number of products.
Here’s a list of items that are linked to CPI:
- State pension.
- Public sector pensions.
- Lifetime allowance for pensions.
- Personal Independence Payments (which are replacing the Disability Living Allowance).
- Attendance Allowance.
- Jobseeker’s Allowance.
- Universal Credit.
- Housing Benefit.
- Income Support.
- Statutory Maternity and Paternity Pay.
- Statutory Sick Pay.
The most notable difference between the two measures is that the RPI is typically 1% higher than the CPI.
In addition, the CPI is stated to “better represent changes in consumer spending habits compared to changes in the price of goods and services” (Office for National Statistics).
If you’re confused or concerned by inflation, or you’d like to speak to a team of accountants who know how to take the numbers off your hands, get in touch with Trinity today.