Consumer Price Index (United Kingdom) - Implementation

Implementation

The CPI calculates the average price increase as a percentage for a basket of 600 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets. Note that unlike the RPI, the CPI takes the geometric mean of prices to aggregate items at the lowest levels, instead of the arithmetic mean. This means that the CPI will generally be lower than the RPI. The rationale is that this accounts for changes in consumer spending behaviour as a result of differences in price changes amongst products. According to the ONS, this difference is the largest contributing factor to the differences between the RPI and the CPI.

The change in the CPI over the 12 months to August 2008 was 4.7%, while the corresponding figure for RPIX (which excludes mortgage interest) was 5.2% and that for RPI (which includes mortgage interest) was 4.8%. The CPI, the RPIX, and the RPI are published monthly by the Office for National Statistics. A history of CPI and RPIX going back to 1989 can be found at the Office for National Statistics website.

There has been criticism of CPI as being a less effective measure of price rises than the Retail Prices Index, accusing it of being easier to manipulate and less broad based (for example excluding housing). John Redwood, the Conservative MP, has said that CPI targeting meant that interest rates were set lower at a time of rising (RPI) inflation.

Nevertheless, the incoming conservative chancellor George Osborne announced that CPI was to be more widely adopted, including for setting benefits and pensions.