After a short review, the Office for National Statistics has decided to leave the Retail Price Index (RPI) unchanged. Instead, a new additional index of inflation – RPIJ (the ‘J’ stands for Jevons, a new geometric formula) – will be brought in by March 2013.
It’s a very important issue. The RSS statement on the announcement spells it out: “how inflation measures are calculated is not just a technical issue for professional users but one of widespread public importance affecting millions of UK citizens“. RPI and Consumer Prices Index (CPI) figures impact on government out-goings such as pensions and benefits. Also on taxation levels.
The National Statistician’s decision to leave RPI broadly as it is (with some tweaking to the measurement of private housing rents) means that index-linked final salary schemes are safe for now – these would have been affected if RPI had been reduced. Train fares, student loans, some utility bills etc might have been affected, but stay the same for now…the list goes on.
What are the RPI and CPI? The RPI has been around since the 1950s/40s and is a measurement of the change in the cost of a basket of retail goods and services. The CPI was taken up in the 1990s and measures the inflation of the price of consumer goods and services purchased by UK households. They sound the same but they are different. The RPI doesn’t include households in the top 4% income bracket and pensioners who rely on state benefits for at least 75% of their income. The RPI tracks owner-occupier housing costs, including mortgage interest costs and council tax. The CPI doesn’t.
Perhaps most importantly, the RPI and CPI use different types of averages to reduce 180,000 individual price quotations – a monthly ‘basket’ of goods and services – into fewer individual item indices. The RPI uses arithmetic averages whereas the CPI generally uses another kind of average, the geometric mean. The latter is less or equal to the arithmetic mean. Generally, this makes CPI around 1% below RPI.
Statisticians have long been concerned that these statistical treatments should generate such a substantial difference in the two indices – other countries do not seem to have the same issues. There can be no case for a continued ‘pick ‘n’ mix’ approach to use of one or the other index in different situations according to preference. The ONS review was prompted by wanting to address the ”formula effect” – the gap between the RPI and CPI – and to find out more about how these differences arise.
Watch this space. The new RPIJ measurement will be published in March 2013. In the meantime, the ONS is continuing to pursue its research programme in the area of consumer price statistics and to work with users to maintain the quality of its consumer price statistics.
For more on this issue, read RPI v. CPI: what’s the difference? why does it matter? and will it make you poorer or richer? in Significance online.