What is Retail Price Index (RPI)
The Retail Price Index (RPI) is one of the two main measures of consumer inflation produced by the United Kingdom's Office for National Statistics. The Retail Price Index (RPI) was introduced in the U.K. in 1947, and was made official in 1956.
BREAKING DOWN Retail Price Index (RPI)
Like the better-known consumer prices index (CPI), the Retail Price Index tracks changes in the cost of a fixed basket of goods over time, and is produced by combining about 180,000 price quotes for over 650 representative items. However, since the introduction of the CPI in 1996, 12-month inflation in the U.K. has generally been about 0.9 percentage points higher when measured by the RPI, as compared to the CPI.
The difference of 0.9 percentage points between the RPI and CPI in the U.K. arises for a number of reasons. Firstly, the RPI includes a number of items that are excluded in the CPI, and vice versa. Secondly, the two indicators measure price change for different target populations. Finally, the two measures use different formulas, leading to a difference known as the "formula effect."
History of the Retail Prices Index in the UK
RPI was first calculated for June 1947, largely replacing the previous Cost of Living Index. It was once the principal official measure of inflation. However, the CPI now largely serves that purpose in practice.
The UK government still uses RPI for some purposes, such as figuring the amounts payable on index-linked securities, including index-linked gilts and social housing rent increases. British employers also use it as a starting point in wage negotiation. However, since 2003, it has no longer been used to set the inflation target for the Bank of England's Monetary Policy Committee, and since April 2011, it has no longer been used as the basis for the indexation of the pensions of former public sector employees. Since 2016, the UK state pension has been indexed by the highest of the increase in average earnings, CPI or a rate of 2.5 percent.
In 2013, following a consultation on possibilities for improving the RPI, the UK national statistician said the formula used to produce the RPI did not meet international standards and recommended that a new index known as RPIJ be published. Subsequently, ONS decided to no longer classify RPI as a "national statistic." However, ONS will continue to calculate RPI, among several versions of the inflation index, in order to provide a consistent historic inflation time series. The index factors continue to be used to adjust for inflation in capital gains for inclusion in the tax computation for entities, subject to corporation tax in the UK.
In January 2018, Mark Carney, Governor of the Bank of England, said that RPI should be abandoned.