Consumer Price Index (United Kingdom)

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The official measure of inflation of consumer prices of the United Kingdom is called the Consumer Price Index (CPI) It is also called the Harmonized Index of Consumer Prices (HICP).^[1]

The traditional measure of inflation in the UK for many years was the Retail Price Index (RPI), which was first calculated in the early 20th Century to evaluate the extent to which workers were affected by price changes during the first world war. The main index was described as the Interim Index of Retail Prices from 1947 to 1955. In January 1956 it was rebased and renamed the Index of Retail Prices. In January 1962 this was (replaced by) the General Index of Retail Prices, which was again rebased at that time. A further rebasing occurred in January 1987, subsequent to the issue of the first index-linked gilts.

An explicit inflation target was first set in October 1992 by Chancellor of the Exchequer Norman Lamont, following the UK's departure from the Exchange Rate Mechanism. Initially, the target was based on the RPIX, which is the RPI calculated excluding mortgage interest payments. This was felt to be a better measure of the effectiveness of macroeconomic policy. It was argued that if interest rates are used to curb inflation, then including mortgage payments in the inflation measure would be misleading. Until 1997, interest rates were set by the Treasury.

On winning power in May 1997, the New Labour government handed control over interest rates to the Bank of England, whose Monetary Policy Committee now sets rates on the basis of an inflation target set by the Chancellor.^[2] If in any month inflation is more than one percentage point off its target, the Governor of the Bank of England is required to write to the Chancellor explaining why.

Since 1996 the United Kingdom has also tracked a Consumer Price Index figure, and in December 2003 its inflation target was changed to one based on the CPI. ^[3] The change in the CPI over the last 12 months is currently 3.0%, while the corresponding figure for RPIX (which excludes Mortgage Interest) is 4.0% and that for RPI (which includes Mortgage Interest) is 4.2% ^[4]. These figures are correct at April 2008. Both the CPI and the RPI are published monthly by the Office for National Statistics.

There has been criticism of CPI as being a far less effective measure of price rises than the Retail Prices Index as it is easier to manipulate and less broad based (for example excluding housing).^[5] John Redwood, the Conservative MP, has said that CPI targeting meant that interest rates were set lower at a time of rising inflation.^[6]

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