Retail Price Index (RPI)
Candlefocus EditorThe RPI is constructed from the prices of a basket of goods and services bought by households. Every month, ONS conducts a survey of over 4,000 shops in the U.K including supermarkets, department stores, and specialist shops. ONS' survey collects prices of nearly 170 representative items. Every month, ONS weights the prices of the goods and services in the basket to create an index value. This value is then compared to the benchmark period where the index value is set to 100.
The RPI is used as cost escalator for government transfer payments and wage contract negotiation as it contains information on cost of living. It is one of the main sources of information on inflation used by the Bank of England, who view the index as a useful tool to inform their decision-making.
In addition to the Consumer Prices Index (CPI) - the official measure of inflation in the UK, the RPI provides a secondary measure of inflation. This can give additional insight into economic activity and trends. For example, RPI is more reflective of the prices of mortgage interest payments and residential rates, whereas the CPI is more responsive to changes in the prices of consumer goods.
The RPI has been criticised in recent years, due to doubts over its accuracy. As such, in 2013, ONS replaced the 'old' RPI with the 'new' RPI - the 'All Items RPI' - where the methodology for calculating the index was changed. This 'new' RPI aims to be more accurate than its predecessor. There is also a new version of the Consumer Prices Index, the CPIH, which includes housing costs, and is considered to be the official measures of UK inflation.
To conclude, the Retail Price Index is an important tool for measuring inflation and the cost of living in the UK. It is used in government transfers and wage agreements and is also important for decision-making in economic activity. While the RPI has been criticised in recent years, it still has its uses and many organisations rely on it to inform their decisions.