CPIH vs. RPI

Attribute	CPIH	RPI
Definition	Consumer Prices Index including owner occupiers' housing costs	Retail Prices Index
Calculation	Based on a basket of goods and services purchased by households	Includes housing costs, mortgage interest payments, council tax, and other expenses
Weighting	Weights updated annually based on household expenditure patterns	Weights updated less frequently, leading to potential inaccuracies
Use	Used by the UK government for inflation targeting and policy decisions	Used for various purposes, including wage negotiations and pensions

Introduction

Consumer Price Index including owner occupiers' housing costs (CPIH) and Retail Price Index (RPI) are two commonly used measures of inflation in the United Kingdom. While both indices aim to track changes in the cost of living over time, they differ in terms of methodology, coverage, and the items they include. In this article, we will compare the attributes of CPIH and RPI to understand their differences and similarities.

Methodology

CPIH is calculated by the Office for National Statistics (ONS) and includes a broader range of housing costs compared to the traditional Consumer Price Index (CPI). It takes into account owner occupiers' housing costs, such as mortgage interest payments, building insurance, and council tax. On the other hand, RPI is calculated using a different formula that includes a wider range of goods and services, making it generally higher than CPIH. RPI also includes mortgage interest payments but does not account for changes in housing costs for owner-occupiers.

Coverage

One of the key differences between CPIH and RPI is the coverage of items included in the indices. CPIH covers a comprehensive range of goods and services that are typically consumed by households, including housing costs. It is considered to be a more accurate reflection of the cost of living for the average consumer. On the other hand, RPI includes a broader range of items, such as mortgage interest payments and certain housing costs, which can lead to higher inflation figures compared to CPIH.

Weighting

Another important aspect to consider when comparing CPIH and RPI is the weighting of items in the indices. CPIH uses a geometric mean formula to calculate the average price change of goods and services, which takes into account the relative importance of each item in the basket. This means that items with higher weights have a greater impact on the overall inflation rate. In contrast, RPI uses an arithmetic mean formula, which gives equal weight to all items in the basket, regardless of their importance to consumers.

Calculation

When it comes to the calculation of inflation rates, CPIH and RPI use different methodologies. CPIH is calculated using the Jevons formula, which is based on the geometric mean of price changes. This formula is considered to be more accurate in reflecting changes in consumer behavior and preferences over time. On the other hand, RPI uses the Carli formula, which is based on the arithmetic mean of price changes. This formula tends to overstate inflation rates compared to the Jevons formula used in CPIH.

Use in Policy Making

Both CPIH and RPI are used by policymakers, economists, and businesses to monitor changes in the cost of living and make informed decisions. However, CPIH is the preferred measure of inflation for the Bank of England and the UK government, as it is considered to be more accurate and reflective of consumer spending patterns. RPI, on the other hand, is still used in certain contracts, such as index-linked gilts and some private sector agreements, despite its limitations and criticisms.

Conclusion

In conclusion, CPIH and RPI are two important measures of inflation in the UK, each with its own strengths and weaknesses. While CPIH provides a more accurate reflection of the cost of living for the average consumer, RPI includes a wider range of items and tends to produce higher inflation figures. Understanding the differences between CPIH and RPI is crucial for policymakers, economists, and businesses to make informed decisions and analyze trends in the economy.