In the United Kingdom, the Retail Prices Index or Retail Price Index[1] (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services.
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RPI was first calculated for June 1947.[2] It was once the principal official measure of inflation. Although it has been superseded in that regard by the Consumer Price Index (CPI), it is still regularly quoted by the UK news media.[3][4]
The RPI is still used by the government as a base for various purposes, such as the amounts payable on index-linked securities including index-linked gilts, and social housing rent increases.[5] Many employers also use it as a starting point in wage negotiation.[6] It is no longer used by the government as the basis for the indexation of the pensions of its former employees.
In March 2009, the change in RPI measured over a 12-month period turned negative, indicating an overall annual reduction in prices, for the first time since 1960.[6] The change in RPI in the 12 months ending in April 2009, at -1.2%, was the lowest since records began in 1948.[7]
Housing associations lobbied the government to allow them to freeze rents at current levels rather than reduce them in line with the RPI, but the Treasury concluded that rents should follow RPI down as far as -2%, leading to savings in housing benefit.[5]
In February 2011, the RPI jumped to 5.1%[8] putting pressure on the Bank of England to raise interest rates despite disappointing projected GDP growth of only 1.6% in 2011.[8] The September 2011 figure of 5.6%, the highest for twenty years, was described by the Daily Telegraph as "shockingly bad".[9]
The highest annual average inflation since the introduction of the RPI came in 1975, when inflation touched 25% for that year. By 1978 it had fallen to less than 10%, but rose again towards 20% over the following two years before the monetarist economic policies of the Conservative government led by Margaret Thatcher (elected in 1979) brought inflation down. By 1982, it had fallen below 10% and a year later was down to 4%, remamining low for several years until approaching double figures again by 1990. Despite a recession in the early 1990s, increased interest rates brought inflation down again to an even lower level.[10]
The United Kingdom RPI is constructed as follows:
This enables the percentage change to be calculated over the desired time period.
In practice the comparison is made over shorter periods, and the weights are frequently reassessed. Detailed information is published on the Office of National Statistics website.
The following items are not included in the CPI: Council tax, mortgage interest payments, house depreciation, buildings insurance, ground rent, solar PV feed in tariffs and other house purchase cost such as estate agents' and conveyancing fees.[11]
CPI is usually lower as a result. The UK Government announced in the June 2010 budget that CPI would be used in place of RPI for uprating of state pensions and other benefits with effect from April 2011.[12]
The variability of the change in RPI is shown in the graph on the right. This was one of the arguments used in favour of changing to RPIX.
Variations on the RPI include the RPIX, which removes the cost of mortgage interest payments, and the RPIY, which excludes indirect taxes (VAT) and local authority taxes as well as mortgage interest payments.