Friday, 2 December 2011


What's all the fuss about six letters: CPI and RPI?

Millions of teachers, nurses and other public sector workers have been told that they'll have to get used to CPI in future and forget about RPI.

What does it all mean?

Most of us know about the Retail Prices Index or RPI. For years it was the "headline" rate of inflation and the rate used for annual upratings of pensions benefits and a host of other payments.

No longer. Now the Consumer Prices Index, CPI, is king.

It is the product of a harmonised European method of calculating the rate of inflation. But that's not why it has become the government's inflation measure of choice.

It is the chosen one, because it is usually a smaller number. Use it and you get a smaller increase and a smaller bill for the taxpayer.

Both indices use a similar basket of popular goods to measure price increases month by month. But the results are different.

When I asked the Office for National Statistics to explain why, this was the analogy they made:

Imagine you go regularly to a market stall to buy apples. One time you turn up and you find that a particular variety - say it's Cox's - has gone up in price. Do you buy them? Maybe you don't. Maybe you turn to another variety which is the same price as before, Braeburns or Pink Lady even, and buy them.

RPI thinking concentrates on the rise in the price of Cox's.

CPI thinking considers the other apples too. It allows for the fact that shoppers may not feel the full impact of a price rise because they are likely to shop around for something cheaper.

The result is that RPI is likely to be 1.4% a year higher than CPI in the long run, according the Office of Budget Responsibility.

Another difference is that RPI includes the cost of home ownership: mortgages and house prices. These are excluded from CPI, so sharp changes in interest rates or prices can make the two indices diverge for a time.

CPI does have a housing element, but it's more to do with the cost of renting.

All of this becomes hugely important over time for the uprating of pensions and benefits.

Getting around 1% less of an increase each year will cost a typical retired public sector worker tens of thousands of pounds over a whole retirement.

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