Retail Price Index (RPI) Definition

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RPI is a long-established inflation gauge used since 1947. It considers a basket of goods and services purchased in UK households from month to month and measures the average change to the total cost of this basket over time to determine the inflation rate. However, due to its shortcomings, the Consumer Price IndexConsumer Price IndexThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more (CPI) has replaced it as a national inflation statistic over the years.

Retail Price Index Explained

RPI measures the variation in prices of a basket of retail items, thereby determining the inflation rate and cost of living. It was introduced in 1947 and accorded an authorized stature in 1956. However, it lost its position as a national statistic in 2013 due to non-compliance with global benchmarks.

Key Takeaways

  • Retail Price Index (RPI) is a legacy measure of inflation computed by the UK’s ONS that assesses the change in prices of certain retail goods and services over time. It is an unofficial inflation indicator mostly used for indexation of pensions, rents, wages, index-linked bonds, National Savings Certificates, etc. RPI is calculated as an arithmetic mean to determine the price variations in goods and services that people use in day-to-day life. It differs from UK’s official inflation statistic, Consumer Price Index (CPI). Unlike CPI, RPI includes owner-occupier housing costs and excludes non-UK households and the two extremes of highest-income and state-dependent pensioner households.

It was observed that RPI was unable to measure prevailing inflation rates accurately. It usually over-or underestimated the price changes, thereby over-or understating inflation. Hence, RPI did not qualify as a good measure of inflation. Nevertheless, the ONS still computes and publishes it because of its utility in long-term contracts and index-linked gilts.  

It continues to be a basis for calculating the annual increase in social housing rent, pensions, wages, interest rates on index-linked gilts, student loans, etc. However, Consumer Price Index (CPI) has replaced it officially as a nationally-recognized inflation indicator.

The ONS considers a generally purchased “basket” of essential goods and services in households across the UK to estimate RPI. It keeps updating this basket to demonstrate the alterations in customer spending habits over a period of time.

The cost of items in the basket is scrutinized over time to reflect the price changes. The basket may include the following items: 

  • FoodAlcoholApparel & footwearFurnitureCarLight & fuelHousing costsTobaccoPersonal items and servicesAudio-visual equipmentLeisure services and productsHousehold appliances and durable goods

Note that RPI solely includes the private UK households, excluding the top 4% of the high-income households and pensioner households obtaining at least 75% of their earnings from benefits. 

RPI Formula and Calculations

The ONS combines 1,80,000 individual costs for around 700 representative goods or services for calculating RPI. Note that the products of the “basket” are often re-evaluated. Therefore, the items included in the basket in the current period must also be there in the base period.

ONS leverages the Living Costs & Food Survey (LFC) data to record household spending criteria throughout the related year. First, each product’s weight is quantified relative to the significance of the product in the family budget. Then, the cost of each item is multiplied by its specified weight to reckon the total contribution as per its importance. 

Once the price of each product is computed in both the base and current period, an arithmetic meanArithmetic MeanArithmetic mean denotes the average of all the observations of a data series. It is the aggregate of all the values in a data set divided by the total count of the observations.read more is applied to calculate the RPI. The two arithmetic averages used for computing RPI are the Dutot and the Carli indices. The Carli method takes an arithmetic mean of price changes, while the Dutot method uses the ratio of average prices in the current and the base periods.

Carli Formula

The Carli formula calculates the rate of changeRate Of ChangeRate of change (ROC) defines the percentage change of a variable like securities over a certain time with respect to its original value. read more in each price first and then takes the arithmetic average of these variations.

where It,0 is the price index, n is the number of price quotes and pi,t is the price of item i at time t. 

Dutot Formula

The Dutot formula calculates the arithmetic average of the prices in each period and then computes the rate of change.

Retail Price Index UK

In conformity with the Statistics and Registration Service Act 2007, the ONS evaluated RPI figures against the Code of Practice for Official Statistics. Resultantly, it discovered RPI’s inefficiency in maintaining the National Statistic status quo. So, CPI was officially designated as the inflation measure.

Even with an unauthorized status, the RPI remains the most extensively utilized inflation indicator because of its use in long-standing contracts that are indexed to inflation. Once published, RPI figures are never edited.

The following entities use it:

  • Annotators and statisticians in business, academia, and governmentThink tanks and voluntary departmentMediaGeneral populaceDebt management officeNational Savings and investmentsHer Majesty’s (HM) revenue and customsMember institutions of the UK Regulators Network (UKRN)Private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more firmsStudent loans companyLandlords

The ONS recently suggested some modifications in the RPI framework. Moreover, the UK Statistics Authority Policy may implement the proposed amendments by February 2030. 

The prevalent budget measures executed in the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more ending 2023 might lessen the annual RPI rate by 0.09%. It is because the monthly rate inflation deviations for the fiscal year ending 2022 (0.12) will counterbalance the monthly rate changes for the fiscal year ending 2023 (0.03). 

Note that the RPI rate has registered an increase of 6.4% during the last 12 months, from 1.4% in January 2021 to 7.8% in January 2022. 

Retail Price Index (RPI) vs Consumer Price Index (CPI)

For more details, have a look at this article – RPI vs CPIRPI Vs CPIThe consumer price index (CPI) measures the change in the price of goods and services purchased by households for consumption. RPI, on the other hand, is a retail price index that was introduced in the United Kingdom as a measure of inflation to evaluate the prices of retail goods and services.read more

This has been a guide to Retail Price Index and its definition. Here we discuss working of retail price index in UK along with its formula & compare it to CPI. You can learn more from the following articles – 

The RPI rate stands at 7.5% for December 2021. It reflects the change in retail goods and services prices purchased by UK households. 

The ONS considers a “basket” of goods and services used for typical UK households. It computes each product’s share relative to its importance in the household budget and assigns a weight. The weights are multiplied by the price of each item to get the weighted cost. RPI is calculated as an arithmetic mean using the Carli and Dutot indices. 

RPI is an unofficial inflation indicator to calculate the cost deviations in retail goods and services, including the homeowner costs. At the same time, CPI is an official inflation measure to calculate the price changes in basic goods and services, excluding housing charges. Also, RPI considers only UK households, excluding 4% of highest-income and state-dependent pensioner households.

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