Measuring Inflation in the UK

The different methods of measuring inflation in the UK

Inflation reduces the value of money because each unit of money can buy fewer goods and services. Inflation calculation helps to determine the average change in the prices of goods and services in an economy. Therefore, households, businesses, and governments are concerned about the country’s inflation rate. In the UK, three different methods are used to measure inflation, namely the Consumer Price Index (CPI), the Retail Price Index (RPI) and the Consumer Price Index including Owner-Occupiers’ Housing Costs (CPIH). 

The inflation rates obtained from these three methods are not the same. This is because they use different formulas and the type of products used for the computation are not the same. For example, CPI does not consider housing costs while they are included in both RPI and CPIH. In addition, the CPI uses a geometric mean to average prices, while RPI uses an arithmetic mean. Consequently, RPI tends to produce a higher inflation rate than CPI.

The Consumer Price Index (CPI)

The CPI became the principal measure of inflation in the UK in 2003.  It is calculated by the Office for National Statistics (ONS). There are several steps involved in the computation of CPI. Firstly, the prices of many goods and services usually consumed by UK households are collated.  Then, the goods and services are classified into different categories such as transportation, food and clothing. A weight is attached to each category based on the proportion of the total spending of a typical household. The inflation rate is then computed by comparing the prices to a base year and calculating the percentage change.

The Retail Prices Index (RPI)

The RPI lost its place as the primary measure of inflation in 2003. It includes some elements not covered by the CPI, such as mortgage interest payments. However, it is still used in certain circumstances, such as in adjusting pensions. The RPI tends to produce a higher inflation rate than the CPI due to its inclusion of housing costs and its use of the arithmetic mean for averaging prices.

The Consumer Price Index including Owner-Occupiers’ Housing Costs (CPIH)

The CPIH was introduced by the ONS to address the limitations of the CPI. It takes into owner-occupiers’ housing costs. The CPIH is considered a more comprehensive measure of inflation as it accounts for the costs associated with owning, maintaining, and living in one’s home. This measure is usually used together with the CPI to provide a broader perspective of inflation in the UK.