JARGON BUSTER: Measures of Inflation

JARGON BUSTER: Measures of Inflation

Measures of inflation are used by the Government to calculate levels of savings interest, state pension and benefits rates, business rates and to influence many other policy decisions.

As consumers it gives us all insight as to how rising prices will affect our investments and spending patterns in the short to medium term.

The Rate of Inflation is the change in prices for goods and services over time. The 2 main measures of Inflation used in the UK are CPI and RPI.

The average change is measured from month-to-month in the prices of consumer goods and services which make up both these indices.

1. Retail Price Index – RPI

RPI includes items which are removed from the CPI basket (see below), including estate agent fees, mortgage interest payments, buildings insurance costs and the cost of the TV licence.

As the RPI was held not to meet international statistical standards, since 2013 the Office for National Statistics no longer classifies it as a “national statistic”, emphasising the  Consumer Prices Index instead.

However, the UK Treasury still uses the RPI measure of inflation for various index-linked tax rises and benefits. As a measure of inflation, it has been in usage since 1947 so allows for comparisons over time.

2. Consumer Price Index – CPI

Consumer price indices are compiled using a large and representative sample of over 700 goods and services, and their price movements are regularly measured in approximately 20,000 outlets within the UK.

The items on the index are updated annually to reflect changes in consumer spending patterns. It’s particularly interesting to note the trends over the last two years.

In the update in 2021, 17 items were added including electric and hybrid cars, hand hygiene gel, men’s loungewear bottoms and smartwatches. And 10 items were removed including staff restaurant sandwiches and gold chains.

Additions to the update in 2022, included meat-free sausages, canned pulses, sports bras, pet collars and antibacterial surface wipes. Items removed this year included doughnuts, men’s suits and coal.

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