Explaining the difference between CPI and RPI
In the United Kingdom, two of the indicators used to measure inflation are CPI and RPI. CPI refers to the consumer price index and is often referred to as the Harmonized Index of Consumer Prices (HICP). RPI refers to the Retail Price Index, which is the change in price of a list of products and services over a period of time.
What is CPI?
CPI is represented as a percentage of the average increase in prices for a group of commodities. There are usually more than 600 items in this group. Every month, the prices of these items are checked at about 12000 stores in the UK. It is published on a monthly basis by the Office for National Statistics.
What is RPI?
In 1947, the RPI was developed to calculate the effect that rising prices was having on the economy following the end of World War II. It remained the single most important determinant of inflation until the CPI became more important. It is published in newspapers and is still utilized by the government so that it can make appropriate changes in pensions and the amount of money paid on any securities that are linked with these indicators. It also affects the rent increases or reductions for social housing. Many employers also make use of the RPI to fix the wages paid to workers.
Difference between CPI and RPI
Most people consider RPI to be superior to CPI because it provides a broader perspective on the average increase in prices from month to month. It looks at the prices of a much larger number of items. For example, it includes the amount of interest paid on mortgages, insurance premiums and the depreciation of house values and these are not part of CPI. At the same time, the changes in fees charged by stockbrokers are considered in CPI, but not in RPI.
The RPI fluctuates when interest rates change, but this has no effect on CPI. CPI uses a wider portion of the population in its calculations and tends to be lower than RPI.
Summary
- CPI and RPI are two of the inflation indicators used in the UK.
- RPI is older than CPI dating back to 1947.
- CPI is more important and is lower than RPI.