‘The huge squeeze on Brits was laid bare today as figures showed inflation has soared to a 20-year high.’ (The Sun, 18 October 2011)
‘Overall, prices in the economy rose 0.6% on the month from August.’ (Guardian, 18 October 2011)
‘Inflation in the UK continued to fall in February, thanks largely to lower gas and electricity bills.’ (BBC News website, 20 March 2012)
‘UK inflation rises more than expected.’ (Daily Telegraph, 16 August 2011)
How often have you read or heard statements like these in the media? Have you ever wondered how ‘inflation’ is measured, or precisely what is meant by a statement such as ‘prices rose by 0.6%’? In Subsection 5.3, you will see that ‘rates of inflation’ are often calculated in the UK using an index of prices paid by consumers, the Consumer Prices Index (CPI), or another slightly different index, the Retail Prices Index (RPI). These indices may be used to calculate the percentage by which prices in general have risen over any given period, and (roughly speaking) this is what is meant by inflation. But what exactly do these price indices measure, and how are they calculated? These are the questions that are addressed in this section.
The CPI and the RPI are the main measures used in the UK to record changes in the level of the prices most people pay for the goods and services they buy. The RPI is intended to reflect the average spending pattern of the great majority of private households. Only two classes of private households are excluded, on the grounds that their spending patterns differ greatly from those of the others: pensioner households and high-income households. The CPI, however, has a wider remit – it is intended to reflect the spending of all UK residents, and also covers some costs incurred by foreign visitors to the UK.
The CPI and RPI are calculated in a similar way to the price index for Gradgrind Ltd’s energy in Section 4. However, they are calculated once a month rather than just once a year, and are based on a very large ‘basket of goods’. The contents of the basket and the weights assigned to the items in the basket are updated annually to reflect changes in spending patterns (as was the case with Gradgrind’s index for energy prices), and the index is ‘chained’ to previous values. However, once decided on at the beginning of the year, the contents of the basket and their weights remain fixed throughout the year.
For the RPI, the price ratio for the basket each month is calculated relative to the previous January. Then the value of the index is obtained by multiplying the value of the index for the previous January by this price ratio. For example,
The CPI works in much the same way, except that price ratios are calculated relative to the previous December. So, for example,
Since these price indices are calculated from price ratios, they measure price changes in terms of the ratio of the overall level of prices in a given month to the overall level of prices at an earlier date. In practice, data on most
prices are collected on a particular day near the middle of the month; the values of the RPI and CPI calculated using these
data are referred to simply as the values of the RPI and CPI for the month. For example, the RPI took the value 239.9 in February 2012.
This value measures the ratio of the overall level of prices in February 2012 to the overall level of prices on a date at
which the index was fixed at its starting value of 100. This date, called a base date, is 13 January 1987 (at the time of writing). Thus the general level of prices in February 2012, as measured by the RPI,
was times the general level of prices in January 1987. The base date has no significance other than to act as a reference point. (The CPI base date is 2005 and this refers to the average level of prices
throughout 2005, not to a specific date in 2005.)
The RPI and CPI are each based on a very large ‘basket’ of goods and services. (The two baskets are similar, but not exactly the same.) Each contains around 700 items including most of the usual things people buy: food, clothes, fuel, household goods, housing, transport, services, and so on. Each basket is an ‘average’ basket for a broad range of households. The items in the baskets are often grouped into broader categories. For the RPI, the five fundamental groups are: ‘Food and catering’, ‘Alcohol and tobacco’, ‘Housing and household expenditure’, ‘Personal expenditure’ and ‘Travel and leisure’. These groups are divided into 14 more detailed subgroups (which are further divided into sections), as shown in Figure 37. The items in the CPI basket are divided into 12 broad groupings called divisions, which are further subdivided.
Figure 37 Structure of the RPI in 2012 (based on data from the Office for National Statistics)
The inner circle shows the five groups, and the outer ring shows the 14 subgroups. Notice that in the inner circle the sector labelled ‘Food and catering’ has been drawn almost twice as large (as measured by area) as that labelled ‘Alcohol and tobacco’. This reflects the fact that the typical household spends nearly twice as much on food and catering as on alcohol and tobacco. The weight of an item or group reflects how much money is spent on it. So the weight of the ‘Food and catering’ group is almost twice that of ‘Alcohol and tobacco’.
The outer ring represents the same total expenditure as the inner circle, but in more detail. For example, in the outer ring the area labelled ‘Food’ (which mostly consists of food bought for use in the home) is more than twice as large as that labelled ‘Catering’ (which includes meals in restaurants and canteens, and take-away meals and snacks), reflecting the fact that the typical household spends more than twice as much on food as on catering; the weight of the subgroup ‘Food’ is more than double the weight of the subgroup ‘Catering’. The chart gives a good indication of average spending patterns in the UK in the early 21st century.
(a) Using Figure 37, estimate roughly what fraction of the expenditure of a typical household is on each of the following groups and subgroups:
Personal expenditure
Housing and household expenditure
Housing
(b) Suppose that a household spends a total of £540 per week on goods and services that are covered by the RPI. Use your answers to part (a) to estimate very approximately how much is spent each week on each of the groups and subgroups in part (a).
To ensure that the basket of goods for the index reflects the proportion of average spending devoted to different types of goods and services, it is necessary to find out how people actually spend their money. The Living Costs and Food Survey (LCF) records the spending reported by a sample of 5000 households spread throughout the UK. Data from the LCF are used to calculate the weights of most of the items included in the RPI basket. Since 1962, the weights have been revised each year, so that the index is always based on a basket of goods and services that is as up to date as possible. Because of this regular weight revision, the index is chained (as was the Gradgrind Ltd index).
(Most of the weights for the CPI come from a different source, the UK National Accounts, though in turn this source is partly based on data from the LCF. Again, the weights are revised each year.)
The weight of a group or subgroup directly depends on the average expenditure of households on that item. In Subsection 2.1, you saw that it is only the relative size of the weights that affects the value of the weighted mean – this is Rule 1 for weighted means. So instead of using the average expenditure of an item as its weight, the expenditure figures for the items can all be multiplied by the same factor to produce a new, more convenient, set of weights. For the RPI, this factor is chosen so that the sum of the weights is 1000. Table 12 shows the 2012 weights used in the RPI for the groups and subgroups. Notice that each group weight is obtained by summing the weights for its subgroups.
Table 12 2012 RPI weights
Group | Subgroup | Weight | Group weight |
---|---|---|---|
Food and catering |
Food |
114 |
|
Catering |
47 |
161 |
|
Alcohol and tobacco |
Alcoholic drink |
56 |
|
Tobacco |
29 |
85 |
|
Housing and household expenditure |
Housing |
237 |
|
Fuel and light |
46 |
||
Household goods |
62 |
||
Household services |
67 |
412 |
|
Personal expenditure |
Clothing and footwear |
45 |
|
Personal goods and services |
39 |
84 |
|
Travel and leisure |
Motoring expenditure |
131 |
|
Fares and other travel costs |
23 |
||
Leisure goods |
33 |
||
Leisure services |
71 |
258 |
|
All items (i.e. the sum of the weights) |
1000 |
The following checklist provided contains the major categories of goods and services included in the RPI. In the next activity, you will be asked to complete the last three columns of this checklist to make rough estimates of your household’s group weights.
Figure 38 A checklist for one household’s average monthly expenditure
The figures already in the checklist were completed for a two-person household. Some of the figures were accurate, others were necessarily very rough estimates. Nevertheless, the household’s weights give a reasonable indication of the proportion of the household’s expenditure (in 2012) on the five main groups used in the RPI.
The total expenditure was £1764. So the group weights were calculated by multiplying all the group total expenditures by a constant factor of 1000/1764, to ensure the weights sum to 1000. The weight for ‘Food and catering’, for example, is
Another way to calculate this is to multiply the proportion of monthly expenditure spent on food and catering by 1000. The proportion is
Since the total weight is 1000, the weight for ‘Food and catering’ is
Notice that the group weights for this particular household differ quite considerably from those used in the RPI in 2012 (see Table 12). For instance, a much greater proportion of expenditure is on ‘Food and catering’ and a much smaller proportion is spent on ‘Alcohol and tobacco’.
Make rough estimates of your own household’s expenditure last year and complete the final columns of the checklist in Figure 38 (Word version provided). For some categories, you may find it easier just to make a rough estimate of, say, your annual expenditure and then divide by 12. If you have no idea at all for a category, then use the corresponding figure in the checklist as a starting point for your own expenditure and adjust it up or down depending on how you think you spend your money. One way of checking that your figures are sensible is to consider how the sum of the expenditures relates to your household’s monthly income. Do not spend more than 15 minutes on estimating your expenditure; accurate figures are not needed.
Divide each group expenditure by your monthly expenditure total and then multiply by 1000 to calculate your household’s group weights.
How do your household’s weights compare with those used in the RPI in 2012?
This subsection concentrates on how the RPI is calculated. Generally the CPI is calculated in a similar way, though some of the details differ. To measure price changes in general, it is sufficient to select a limited number of representative items to indicate the price movements of a broad range of similar items. For each section of the RPI, a number of representative items are selected for pricing. The selection is made at the beginning of the year and remains the same throughout the year. It is designed in such a way that the price movements of the representative items, when combined using a weighted mean, provide a good estimate of price movements in the section as a whole.
For example, in 2012 the representative items in the ‘Bread’ section (which is contained in the ‘Food and catering’ group) were: large white sliced loaf, large white unsliced loaf, large wholemeal loaf, bread rolls, garlic bread. Changes in the prices of these types of bread are assumed to be representative of changes in bread prices as a whole. Note that although the price ratio for bread is based on this sample of five types of bread, the calculation of the appropriate weight for bread is based on all kinds of bread. This weight is calculated using data collected in the Living Costs and Food Survey.
The bulk of the data on price changes required to calculate the RPI is collected by staff of a market research company and forwarded to the Office for National Statistics for processing. Collecting the prices is a major operation: well over 100 000 prices are collected each month for around 560 different items. The prices being charged at a large range of shops and other outlets throughout the UK are mostly recorded on a predetermined Tuesday near the middle of the month. Prices for the remaining items, about 140 of them, are obtained from central sources because, for example, the prices of some items do not vary from one place to another.
One aim of the RPI is to make it possible to compare prices in any two months, and this involves calculating a value of the price index itself for every month.
The Office for National Statistics (ONS) updates the basket of goods every year, reflecting advancing technology, changing tastes and consumers’ spending habits. The media often have fun writing about the way the list of representative items changes each year.
In the 1950s, the mangle, crisps and dance hall admissions were added to the basket, with soap flakes among the items taken out.
Two decades later, the cassette recorder and dried mashed potato made it in, with prunes being excluded.
Then after the turn of the century, mobile phone handsets and fruit smoothies were included. The old fashioned staples of an evening at home – gin and slippers – were removed from the basket.
So now, in 2012, it is the turn of tablet computers to be added to mark the growing popularity of this type of technology.
That received the most coverage when it was added to the basket of goods, with the ONS highlighting this digital-age addition in its media releases.
But those seafaring captains who once used the then unusual fruit as a symbol to show they were home and hosting might be astonished to find that centuries on, the pineapple has also been added to the inflation basket.
Technically, the pineapple has been added to give more varied coverage in the basket of fruit and vegetables, the prices of which can be volatile.
(Source: BBC News website, 14 March 2012)
So, calculating the RPI involves two kinds of data:
the price data, collected every month
the weights, representing expenditure patterns, updated once a year.
Once the price data have been collected each month, various checks, such as looking for unbelievable prices, are applied and corrections made if necessary. Checking data for obvious errors is an important part of any data analysis.
Then an averaging process is used to obtain a price ratio for each item that fairly reflects how the price of the item has changed across the country. The exact details are quite complicated and are not described here. (If you want more details, they are given in the Consumer Price Indices Technical Manual, available from the ONS website. Consumer Price Indices: A brief guide is also available from the same website.)
For each item, a price ratio is calculated that compares its price with the previous January. For instance, for November 2011, the resulting price ratio for an item is an average value of
The next steps in the process combine these price ratios, using weighted means, to obtain 14 subgroup price ratios, and then the group price ratios for the five groups. Finally, the group price ratios are combined to give the all-item price ratio. This is the price ratio, relative to the previous January, for the ‘basket’ of goods and services as a whole that make up the RPI.
The all-item price ratio tells us how, on average, the RPI ‘basket’ compares in price with the previous January. The value of the RPI for a given month is found by the method described in Section 4, that is, by multiplying the value of the RPI for the previous January by the all-item price ratio for that month (relative to the previous January):
Thus, to calculate the RPI for November 2011, the final step is to multiply the value of the RPI in January 2011 by the all-item price ratio for November 2011.
Here are the details of the last two stages of calculation of the RPI for November 2011, after the group price ratios have been calculated, relative to January 2011. The appropriate data are in Table 13.
Table 13 Calculating the all-item price ratio for November 2011
Group | Price ratio: ![]() |
Weight: ![]() |
Ratio ![]() ![]() |
---|---|---|---|
Food and catering |
1.030 |
165 |
169.950 |
Alcohol and tobacco |
1.050 |
88 |
92.400 |
Housing and household expenditure |
1.037 |
408 |
423.096 |
Personal expenditure |
1.128 |
82 |
92.496 |
Travel and leisure |
1.026 |
257 |
263.682 |
Sum |
1000 |
1041.624 |
You may have noticed that the weights here do not exactly match those in Table 12. That is because the weights here are the 2011 weights, and those in Table 12 are the 2012 weights, and as has been explained, the weights are revised each year.
The all-item price ratio is a weighted average of the group price ratios given in the table. If the price ratios are denoted by the letter r, and the weights by w, then the weighted mean of the price ratios is the sum of the five values of rw divided by the sum of the five values of w. The formula, from Subsection 2.3, is
The sums are given in Table 13. (The sum of the weights is 1000, because the RPI weights are chosen to add up to 1000.) Although
Table 13 gives the individual values, there is no need for you to write down these individual products when finding a weighted mean (unless you are asked
to do so). As mentioned previously, your calculator may enable you to calculate the weighted mean directly, or you may use
its memory to store a running total of
.
Now the all-item price ratio for November 2011 (relative to January 2011) can be calculated as
This tells us that, on average, the RPI basket of goods cost 1.041 624 times as much in November 2011 as in January 2011.
The published value of the RPI for January 2011 was 229.0. So, using the formula,
The final result has been rounded to one decimal place, because actual published RPI figures are rounded to one decimal place.
Example 22 is the subject of the following screencast. [Note that references to ‘the unit’ should be interpreted as ‘this course’. The original wording refers to the Open University course from which this material is adapted.]
Video content is not available in this format.
Screencast 5 Calculating an RPI
The same 2011 weights were used to calculate the RPI for every month from February 2011 to January 2012 inclusive. For each of these months, the price ratios were calculated relative to January 2011, and the RPI was finally calculated by multiplying the RPI for January 2011 by the all-item price ratio for the month in question. In February 2012, however, the process began again (as it does every February). A new set of weights, the 2012 weights, came into use. Price ratios were calculated relative to January 2012, and the RPI was found by multiplying the RPI value for January 2012 by the all-item price ratio. This procedure was used until January 2013, and so on.
The process of calculating the RPI can be summarised as follows.
The data used are prices, collected monthly, and weights, based on the Living Costs and Food Survey, updated annually.
Each month, for each item, a price ratio is calculated, which gives the price of the item that month divided by its price the previous January.
Group price ratios are calculated from the price ratios using weighted means.
Weighted means are then used to calculate the all-item price ratio. Denoting the group price ratios by and the group weights by
, the all-item price ratio is
The value of the RPI for that month is found by multiplying the value of the RPI for the previous January by the all-item price ratio:
The weights for a particular year are used in calculating the RPI for every month from February of that year to January of the following year.
Find the value of the RPI in July 2011 by completing the following table and the formulas below. The value of the RPI in January 2011 was 229.0. (The base date was January 1987.)
Table 14 Calculating the RPI for July 2011
Group | Price ratio for July 2011 relative to January 2011: ![]() |
2011 weights: ![]() |
Price ratio ![]() ![]() |
---|---|---|---|
Food and catering |
1.024 |
165 |
|
Alcohol and tobacco |
1.042 |
88 |
|
Housing and household expenditure |
1.012 |
408 |
|
Personal expenditure |
1.053 |
82 |
|
Travel and leisure |
1.030 |
257 |
|
Sum |
(Source: Office for National Statistics)
The published value for the RPI in July 2011 was 234.7, slightly different from the value you should have obtained in Activity 21 (that is, 234.6). The discrepancy arises because the government statisticians use more accuracy during their RPI calculations, and round only at the end before publishing the results.
The following activity is intended to help you draw together many of the ideas you have met in this section, both about what the RPI is and how it is calculated.
Between February 2011 and February 2012, the price of leisure goods fell on average by 2.3%, while the price of canteen meals rose by 2.8%. Answer the following questions about the likely effects of these changes on the value of the RPI. (No calculations are required.)
(a) Looked at in isolation (that is, supposing that no other prices changed), would the change in the price of leisure goods lead to an increase or a decrease in the value of the RPI?
Would the change in the price of canteen meals (looked at in isolation) lead to an increase or a decrease in the value of the RPI?
(b) In each case, is the size of the increase or decrease likely to be large or small?
(c) Using what you know about the structure of the RPI, decide which of ‘Leisure goods’ and ‘Canteen meals’ has the larger weight.
(d) Which of the price changes mentioned in the question will have a larger effect on the value of the RPI? Briefly explain your answer.
The RPI and CPI are intended to help measure price changes, so we shall start this section by describing how to use them for this purpose.
The BBC News website reported (20 March 2012) ‘UK inflation rate falls to 3.4% in February’. What does that actually mean?
The rest of the BBC article makes it clear that this ‘inflation’ figure was based on the CPI rather than the RPI, but its meaning is still not obvious. What is usually meant in situations like this is the following.
In the UK, the (annual) rate of inflation is the percentage increase in the value of the CPI (or the RPI) compared to one year earlier.
(In this course, it will always be made clear whether you should use the CPI or the RPI in contexts like this.)
The annual rate of inflation is sometimes called the year-on-year rate of inflation.
In February 2012, the CPI was 121.8. Exactly a year earlier, in February 2011, the CPI was 117.8. The ratio of these two values is
So the value of the CPI in February 2012 was 3.4% higher than in the previous February. That is the source of the number in the BBC headline.
In February 2012, the RPI was 239.9. Exactly a year earlier, in February 2011, the RPI was 231.3. Calculate the annual inflation rate for February 2012, based on the RPI.
The fact that the inflation rates that are generally reported in the media relate to price increases (as measured in a price index) over a whole year means that one has to be careful in interpreting the figures, in several ways.
Media reports might say that ‘inflation is falling’, but this does not mean that prices are falling. It simply means that the annual inflation rate is less than it was the previous month. So when the BBC headline said that the (annual) inflation rate had fallen to 3.4% in February 2012, it meant that the February 2012 rate was smaller than the January 2012 rate (which was 3.6%). Prices were still rising, but not quite so quickly.
The change in price levels over one month may be, and indeed usually is, considerably different from the annual inflation rate. For instance, prices actually fell between December 2011 and January 2012: the CPI was 121.7 in December 2011 and 121.1 in January 2012. (Prices in the UK usually fall between December and January in the UK, as Christmas shopping ends and the January sales begin.) But the annual inflation rate for January 2012, measured by the CPI, was 3.6%.
The effect of a single major cause of increased prices can persist in the annual inflation rates long after the prices originally increased. For instance, the standard rate of value added tax (VAT) in the UK went up from 17.5% to 20% at the start of January 2011, causing a one-off increase in the price (to consumers) of many goods and services. This showed up in the annual inflation rate for January 2011, where prices were 4.0% higher than a year earlier. Moreover, the annual inflation rate for every other month in 2011 was also affected by the VAT increase, because in each case the CPI was being compared to the CPI in the corresponding month in 2010, before the VAT increase.
Another important use of price indices like the RPI and CPI is for index-linking. This is used for such things as savings and pensions, as a means of safeguarding the value of money held or received in these forms.
To index-link any amount of money, the amount in question is multiplied by the same ratio as the change in the value of the price index. Another term for this process is indexation.
It is important to stress the notion of ratio in index-linking, because it is only by calculating the ratio of two indices that you can get an accurate measure of how prices have increased. For example, an increase in the RPI from 100 to 200 represents a 100% increase in price, whereas a further RPI increase from 200 to 300 represents only a further 50% increase in price.
The value of the RPI for February 2012 was 239.9 whereas the corresponding figure for February 2011 was 231.3. So an index-linked pension that was, say, £450 per month in February 2011, would be increased to
for February 2012. The reason for index-linking the pension in this way is that the increased pension would buy the same amount of goods or services in February 2012 as the original pension bought in February 2011 – that is, it should have the same purchasing power.
Pensions can be, and indeed increasingly are, index-linked using the CPI rather than the RPI.
An index-linked pension was £120 per week in November 2010. It is index-linked using the CPI. How much should the pension be per week in November 2011? The value of the CPI was 115.6 in November 2010 and 121.2 in November 2011.
This principle leads to another much-quoted figure which can be calculated directly from the RPI: the purchasing power of the pound. (This is the purchasing power of the pound within this country, not its purchasing power abroad; the latter is a distinct and far more complicated concept.) The purchasing power of the pound measures how much a consumer can buy with a fixed amount of money at one point of time compared with another point of time.
The word compared here is again important; it makes sense only to talk about the purchasing power of the pound at one time compared with another. For example, if £1 worth of goods would have cost only 60p four years ago, then we say that the purchasing power of the pound is only 60p compared with four years earlier.
The purchasing power (in pence) of the pound at date compared with date
is
The purchasing power of the pound could be calculated using the CPI instead, though the figures published by the Office for National Statistics do happen to use the RPI.
(a)
The purchasing power of the pound in February 2012 compared with February 2011 was
(231.3 and 239.9 are the two RPI values given in Activity 23.)
We round this to give 96p.
(b)
The purchasing power of the pound in February 2012 compared with the base date, January 1987, was
(At the base date, the value of the RPI is 100 by definition.)
This is, after rounding, 42p.
Table 15 Values of the RPI from January 2009 to December 2011
Month | 2009 | 2010 | 2011 |
---|---|---|---|
January |
210.1 |
217.9 |
229.0 |
February |
211.4 |
219.2 |
231.3 |
March |
211.3 |
220.7 |
232.5 |
April |
211.5 |
222.8 |
234.4 |
May |
212.8 |
223.6 |
235.2 |
June |
213.4 |
224.1 |
235.2 |
July |
213.4 |
223.6 |
234.7 |
August |
214.4 |
224.5 |
236.1 |
September |
215.3 |
225.3 |
237.9 |
October |
216.0 |
225.8 |
238.0 |
November |
216.6 |
226.8 |
238.5 |
December |
218.0 |
228.4 |
239.4 |
(Source: Office for National Statistics)
For each of the following months, use the values of the RPI in Table 15 to calculate the annual inflation rate (based on the RPI) and to calculate the purchasing power of the pound (in pence) compared to one year previously.
(a) May 2010
(b) October 2011
(c) March 2011
You have seen that the RPI can be used as a way of updating the value of a pension to take account of general increases in prices (index-linking). The RPI is used in other similar ways, for instance to update the levels of some other state benefits and investments. But the CPI could be used for these purposes.
Why are there two different indices? Let’s look at how this arose. As well as its use for index-linking, which is basically to compensate for price changes, the RPI previously played an important role in the management of the UK economy generally. The government sets targets for the rate of inflation, and the Bank of England Monetary Policy Committee adjusts interest rates to try to achieve these targets. Until the end of 2003, these inflation targets were based on the RPI, or to be precise, on another price index called RPIX which is similar to the RPI but omits owner-occupiers’ mortgage interest payments from the calculations. (There are good economic reasons for this omission, to do with the fact that in many ways the purchase of a house has the character of a long-term investment, unlike the purchase of, say, a bag of potatoes.) From 2004, the inflation targets have instead been set in terms of the CPI. The CPI is calculated in a way that matches similar inflation measures in other countries of the European Union. (So it can be used for international comparisons.)
In terms of general principles, though, and also in terms of most of the details of how the indices are calculated, the differences between the RPI and CPI are not actually very great. As mentioned in Subsection 5.1, the CPI reflects the spending of a wider population than the RPI. Partly because of this, there are certain items (e.g. university accommodation fees) that are included in the CPI but not the RPI. There are also certain items that are included in the RPI but not the CPI, notably some owner-occupiers’ housing costs such as mortgage interest payments and house-building insurance. Finally, the CPI uses a different method to the RPI for combining individual price measurements.
Because of these differences, inflation as measured by the CPI tends usually to be rather lower than that measured by the RPI. In Example 23, you saw that the annual inflation rate in February 2012 as measured by the CPI was 3.4%. The annual inflation rate in the same month, as measured by the RPI, was 3.7%, as you saw in Activity 23. The RPI continues to be calculated and published, and to be used to index-link payments such as savings rates and some pensions. (Arguably it is rather strange to use the RPI to index pensions, given that (as was said at the beginning of Subsection 5.1) the RPI omits the expenditure of pensioner households.) However, there are reasons why the RPI is more appropriate than the CPI for some such purposes, and it seems likely to continue in use for a long time. Furthermore, changes in how index-linking is done can be politically very controversial. For instance, in 2010, the UK government announced that in future, public sector pensions would be index-linked to the CPI rather than the RPI, which caused major complaints from those affected (because inflation as measured by the CPI is usually lower than that measured using the RPI, so pensions will not increase so much in money terms).
You might be asking yourself which is the ‘correct’ measure of inflation – RPI, CPI, or something else entirely. There is no such thing as a single ‘correct’ measure. Different measures are appropriate for different purposes. That’s why it is important to understand just what is being measured and how.
The following exercises provide extra practice on the topics covered in Section 5.
Find the value of the RPI in February 2012, using the data in the table below. The value of the RPI in January 2012 was 238.0.
Table 16 Calculating the RPI for February 2012
Group | Price ratio for February 2012 relative to January 2012: ![]() |
2012 weights: ![]() |
Price ratio ![]() ![]() |
---|---|---|---|
Food and catering |
1.009 |
161 |
|
Alcohol and tobacco |
1.005 |
85 |
|
Housing and household expenditure |
1.003 |
412 |
|
Personal expenditure |
1.040 |
84 |
|
Travel and leisure |
1.005 |
258 |
|
Total |
(Source: Office for National Statistics)
For each of the following months, use Table 15 (in Subsection 5.3) to calculate the annual inflation rate given by the RPI and to calculate the purchasing power of the pound (in pence) compared to one year previously.
(a) October 2010
(b) January 2011
An index-linked pension (linked to the RPI) was £800 per month in April 2010. How much should it be in April 2011? (Again, use the RPI values in Table 15.)