RPI vs CPI: contrasting cost of living measurements

author: FutureCar Staff    

UK inflation on the Consumer Prices Index (CPI) fell to 6.8% in July due to a decrease in energy bills, although core inflation remains high.

According to data from the Office for National Statistics (ONS), the UK inflation rate dropped again in July, providing some positive news. The implementation of the Ofgem energy price cap resulted in a significant reduction in energy bills, causing the headline rate of the Consumer Prices Index (CPI) to decrease from 7.9% to 6.8%. This is the lowest level of price rises in the past 17 months.

While prices are still increasing and the cost of living crisis persists, the slowing down of price hikes could potentially allow wages and purchasing power to keep up with or even surpass inflation in the near future. However, it should be noted that real-terms spending power is significantly lower than it was two years ago when inflation began to rise, and it may take several years to recover.

Within the headline inflation figure, there are some statistics that may have negative implications for consumers. Core inflation remains stubbornly high, and there has been an increase in services inflation. This could indicate the presence of "sticky" inflation in the UK economy, which the Bank of England aims to eliminate through interest rate hikes. Economists predict that these factors, along with unexpectedly strong wage growth figures, will lead to an interest rate hike in September.

So, how is inflation calculated and what do the CPI and RPI mean? Let's explore the ONS's inflation measures.

Inflation is an economic term used to describe the increase in prices of goods and services, which in turn affects the purchasing power of money in a country over a specific period of time. The rate of price increases can vary based on various factors, such as high energy costs.

Every month, the ONS assesses whether prices are inflating or deflating by examining approximately 180,000 prices for around 700 everyday items in 140 locations across the UK. This collection of prices is known as the "basket of goods." The ONS compares the current average price of these goods with the average price measured in the previous year.

Therefore, the 6.8% increase measured by the CPI in July 2023 means that, on average, goods are priced 6.8% higher than they were 12 months ago. In real terms, a product that cost £1 on average in July last year would now cost just under £1.07. It's important to note that the inflation rate in July of the previous year was 10.1%, so the current rate is an increase on top of already significant price hikes. Although the headline figure is lower month-on-month, it still indicates a rise in prices.

While these figures provide an overall direction of inflation, specific categories may have inflation rates higher or lower than the headline figure. For example, sugar has an inflation rate of 54.5%, while diesel is deflating at a rate of 26.6%.

These statistics are not only used by the government to determine the level of state benefits, among other things, but they also help UK households assess the affordability of their budgets and decide when to make major purchases. However, the ONS uses two slightly different approaches to express price inflation.

The CPI index is a measure of inflation that solely relies on the ONS's "basket of goods." This basket consists of items considered essential to daily life in the UK and is updated annually to reflect changing consumer habits. For example, meat-free sausages, sports bras, and antibacterial surface wipes were added in 2022, while E-bikes, home security cameras, and frozen berries were recently added. Items like alcopops, digital compact cameras, and non-Top 40 CDs have been removed from the 2023 basket. The basket is weighted so that more important household items, such as milk, have a greater influence on the overall index compared to less essential items. These weightings change over time as shopping habits evolve and new products become popular.

The CPI index is used by major economies worldwide and was officially adopted by the UK in 1996. As the official measure of inflation, it helps determine the state pension, state benefits, and statutory sick pay rates, which are usually determined by the September CPI. However, it is not a comprehensive measure of the UK cost of living as it does not include certain significant household costs like council tax or mortgage repayments.

The RPI index serves a similar purpose to the CPI but typically tracks slightly higher. In October 2022, it reached a record high of 14% but has since fallen to 9%. The main difference is that the RPI index includes mortgage interest payments, making it more influenced by house prices and interest rates compared to the CPI, which does not consider these factors. Despite its higher tracking, the RPI is not used as an official measure of inflation by the government due to concerns about its calculation method being inferior to the CPI.

FutureCar Staff