Introduction to consumer price inflation

In this module you will be introduced to the different measures of consumer price inflation in the UK, the concepts underlying these measures and their uses. 

Measures of consumer price inflation

CPIH - Consumer Prices Index (CPI) including owner-occupiers' housing costs (OOH)

CPIH is a measure of inflation based on economic principles. It measures the change in the prices of a broad sample of the goods and services that are consumed by households, often referred to as the ‘basket of goods’. The items within this basket of goods are weighted in proportion to the total amount of household expenditure, meaning that items on which households spend more money will have a greater influence on the rate of inflation.

The CPIH includes a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.  Both OOH and Council Tax are significant expenses for many households, meaning that CPIH is a comprehensive measure of price change across the economy as a whole. 

CPI - Consumer Prices Index

The Consumer Prices Index (CPI) is based on the same principles as CPIH although it does not include owner occupiers' housing costs or Council Tax. Because it is also the UK Harmonised Index of Consumer Prices (HICP), it enables us to produce a measure that is comparable across Europe and with other countries

RPI - Retail Prices Index

First developed in the 1940's, RPI has the longest historical series of all the consumer price inflation series. However, the methods used to produce the RPI are not consistent with internationally recognised best practice, a flaw which led to it losing National Statistic status in 2013. It's use is now strongly discouraged. 

There are a number of long-established uses of RPI, including index-linked gilts and long-term contracts, which make it impractical to stop its publication. For this reason, while we have significantly scaled back publication of RPI-related data, we continue to publish the minimum necessary to ensure the critical and essential needs of existing users are met. 

HCIs - Household Costs Indices

In addition to the other presented indices, there is value in providing a set of measures that reflect the change in costs as experienced by different household groups (for example pensioner households).

The costs faced can vary widely across household groups. As the approach aims to better reflect household experience, it is meaningful to focus analysis on these groups, while an aggregate measure covering all households may be useful for comparative purposes.

To put these figures in context and to provide a better understanding of the purchasing power of household income, it will be important to present these changes to household costs alongside a corresponding measure of household income.

This measure is currently in development

Match the text to the measures

Each paragraph is relevant to only one inflation measure. Read the text carefully and drag and drop the text to the measure you think it corresponds to. 
  • CPIH
    includes a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.
  • CPI
    does not include owner occupiers' housing costs or Council Tax meaning it can be used to compare UK inflation with Europe and other countries
  • RPI
    its methods are not consistent with internationally recognised best practice, a flaw which led to it losing National Statistic status in 2013. It's use is now strongly discouraged.
  • HCIs
    are being developed to provide a set of emasures that reflect the change in costs as experienced by different household groups.

Common attributes

Basket of goods and services

A 'basket' of goods and services is chosen. The items chosen are representative of what consumers spend their money on. 

The basket is updated every year to ensure it remains representative. 

Monthly price collection

The majority of goods and services within the basket are collected monthly. A small number of products are collected less frequently if their prices are known to be relatively stable. 

Fixed base price indices

Prices are collected in a 'base' period. This is typically January. 

Prices for subsequent months are then compared to the price in January, to see how much they have changed. 

Weights

Each item is weighted in proportion to how much money people spend on that item. For example, on average, people spend more on fuel than they do on toothpaste. 

By giving items weights, we can ensure that items which people spend more money on have a greater influence on the inflation rate. 

Annual updates

The basket is updated every year. This allows for the introduction of new goods and services. 

It also ensures the outlets being collected from remain representative.

The weights are also adjusted each year to using the most recent information available on consumers expenditure on each item. 

Chain linking

When the basket is updated each year a new series is created. To provide a long term measure of price change, these series are linked together. 

To link the series, an overlap month is used. In the overlap month both the old and new samples are collected. The new series starting at month 1, is then linked to the old series ending with month 13. 

Fill in the blanks to this paragraph

A representative basket of goods and services is chosen every . Prices for these items are collected every .  Prices collected are compared to a  period. Items are given a  to ensure that items which people spend more money on have more of an impact on inflation. The sample of items are updated . The items are then linked together to provide a long term measure of price change