RPI vs CPI: understanding the disparities in cost of living measurements

author: FutureCar Staff    

The UK inflation rate fell to 6.8% on the Consumer Prices Index (CPI) in July, thanks to a decrease in energy bills. This is good news as it shows that price hikes are slowing down, although core inflation remains high. The drop in energy bills, resulting from the Ofgem energy price cap, helped the headline rate of CPI fall from 7.9% to 6.8%, the lowest level in 17 months.

While this decrease in inflation is positive, it is important to note that prices are still rising and the cost of living crisis is still a concern. However, the slower rate of price increases could potentially allow wages to keep up with inflation, if not surpass it, in the near future. It is worth mentioning that real-terms spending power is still considerably lower than it was two years ago, and it may take several years to fully recover.

Within the headline inflation figure, there are some concerning statistics for consumers. Core inflation remains stubbornly high, and services inflation has increased. This could indicate "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 likely lead to an interest rate hike in September.

So, how is inflation calculated and what do the CPI and RPI mean? The Office for National Statistics (ONS) measures inflation by comparing the average prices of around 700 everyday items in 140 locations across the UK. The current average price is then compared to the average price from the previous year. For example, the 6.8% increase measured by the CPI in July 2023 means that goods are priced, on average, 6.8% higher than they were 12 months ago.

These inflation figures are not only important for the government to set the level of state benefits, but they also help UK households assess their budgets and make major purchases. The ONS uses two different approaches to express price inflation. The CPI index is a measure of inflation based on the ONS's "basket of goods," which represents items essential to UK daily life. The basket is updated annually to reflect changing shopping habits. On the other hand, the RPI index includes mortgage interest payments and is more influenced by house prices and interest rates.

FutureCar Staff