CPI vs. CPIH

Attribute	CPI	CPIH
Definition	Consumer Price Index	Consumer Price Index including owner-occupiers' housing costs
Scope	Measures changes in the price level of a basket of consumer goods and services	Includes housing costs such as mortgage interest payments, council tax, and house depreciation
Calculation	Based on a fixed basket of goods and services	Includes housing costs in addition to the fixed basket of goods and services
Usage	Commonly used to measure inflation and adjust wages and pensions	Provides a more comprehensive measure of inflation for households that own their homes

Introduction

Consumer Price Index (CPI) and Consumer Price Index including owner-occupiers' housing costs (CPIH) are two important measures of inflation used by economists and policymakers to track changes in the cost of living. While both indices aim to measure the overall price level in an economy, they differ in terms of the items they include and the methodology used to calculate them.

Components

CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. This basket includes items such as food, housing, clothing, transportation, and medical care. On the other hand, CPIH includes all the items in the CPI basket as well as owner-occupiers' housing costs, such as mortgage interest payments, building insurance, and council tax.

Calculation Method

The calculation of CPI is based on a fixed basket of goods and services, with weights assigned to each item based on its relative importance in the average consumer's expenditure. The prices of these items are then tracked over time to calculate the index. In contrast, CPIH uses a geometric mean formula to account for changes in the composition of the basket due to consumer substitution behavior. This method is considered to provide a more accurate measure of inflation.

Accuracy

One of the main criticisms of CPI is that it does not fully capture the housing costs of owner-occupiers, as it only includes rental costs and not the costs associated with owning a home. This limitation can lead to an understatement of inflation, especially in times of rising house prices. CPIH addresses this issue by including a measure of owner-occupiers' housing costs, providing a more comprehensive picture of inflation that better reflects the cost of living for homeowners.

Use in Policy

Both CPI and CPIH are used by central banks and governments to set monetary policy and make decisions about interest rates and social benefits. While CPI is the more widely recognized measure of inflation, some argue that CPIH is a more accurate reflection of the true cost of living for households. Policymakers must consider the strengths and limitations of each index when making decisions that affect the economy and the well-being of the population.

Conclusion

In conclusion, CPI and CPIH are both important measures of inflation that provide valuable insights into changes in the cost of living. While CPI is a more traditional measure that focuses on a fixed basket of goods and services, CPIH offers a more comprehensive view by including owner-occupiers' housing costs. Both indices have their strengths and limitations, and policymakers must carefully consider which measure best suits their needs when making important decisions that impact the economy and society as a whole.