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Last Updated: Tuesday, 17 April 2007, 09:04 GMT 10:04 UK
Q&A: UK inflation measures
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There are many different ways to calculate inflation
The latest UK inflation figures have shown a sharp jump in the rate at which prices are increasing.

For the first time the Consumer Prices Index (CPI) has gone beyond the target range set by the government - which is one percentage point above or below an inflation rate of 2%.

In March, CPI stood at an 11-year high of 3.1%, while the Retail Prices Index (RPI) hit 4.8% - its fastest rate of growth since 1991.

The inflation measures can have a major influence on the economy, affecting matters such as interest rate decisions, pensions and wage settlements.

Why is there more than one inflation measure?

Basically because there are many different ways of measuring the way that prices change.

Both the CPI and RPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated.

The RPI measure is arguably the better known in the UK. Sometimes referred to as the "headline" rate of inflation, it is the rate often cited by unions as a benchmark for agreeing pay settlements.

The CPI measure is the rate the government's inflation target is based on. It is an internationally comparable measure of inflation - CPI inflation measures are analysed by the European Central Bank when setting interest rates in the eurozone.

It has been around informally since the 1988, but was properly launched in January 1997.

How are they calculated?

Both the CPI and RPI are an attempt to measure the changes in the cost of buying a representative basket of UK goods and services.

The methods used to calculate both indexes are similar. Each month thousands of prices for a selection of goods and services are analysed to check on any increases.

Some of the goods and services will carry a higher weighting, reflecting the fact that we spend more on some items than others.

Each year, the make-up of the "basket" of good and services, and the weightings assigned to them, are revised to take into account changes in spending patterns.

For example, in recent years people have tended to spend more of their money on electrical goods, travel and leisure, while the proportion they have spent on basic items such as food has fallen.

So why do the CPI and RPI values differ?

Not all the items covered by the RPI are included in the CPI measure.

For example, the CPI does not include Council Tax, mortgage interest payments and some other housing costs.

The CPI measure also includes some items - such as charges for financial services - which are not in the RPI.

Another difference is that the CPI measure covers a broader sample of the population in its calculations than RPI.

There is also a difference in the mathematical methods used to calculate the price changes which, the Office for National Statistics says, means that in practice the CPI always shows a lower inflation rate than the RPI rate for given price data.

Why does the government target the CPI rate?

Until 2003, the government targeted a rate of inflation known as RPIX - which, unlike the RPI measure, excludes mortgage interest payments.

However, in his pre-Budget speech in December 2003, Chancellor Gordon Brown said the inflation target would be switched to the CPI measure with immediate effect.

The government cited three reasons why CPI was a better measure for the purposes of setting monetary policy:

  • it gives a more realistic characterisation of consumer behaviour
  • it gives a better picture of spending patterns in the UK
  • it is a more comparable measure of inflation internationally and represents international best practice

The government's current target for CPI is 2%, which the Bank of England is tasked with hitting.

If the rate moves by more than one percentage point either way - that is, it breaks out of the range 1-3% - the governor of the Bank of England must write to the chancellor to explain why.




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