When a company sets the prices for its products or services, it needs to consider the ongoing impact of inflation on its pricing strategy. As the rate of inflation changes, this usually necessitates a price change for the company’s offering. The Retail Price Index (RPI) is one of two methods used to track inflation and influence the retail price of goods and services.
What is the RPI?
The Retail Price Index (RPI) is an unofficial statistic that measures consumer inflation. It is tracked by the Office of National Statistics (ONS) alongside the Consumer Price Index (CPI). It was first introduced in 1947 and officially implemented in 1956, after which it became the official means of measuring consumer inflation.
It remained the official measure of inflation until it was replaced by the Consumer Price Index (CPI) in 2003. Since 2013 it has been an unofficial statistic. Nonetheless, it is a price index that influences a range of items that affect consumers including:
Wage rates and increases
Tax allowances on index-linked securities like Social Impact Bonds
Rent increases on social housing
Mobile phone tariffs
Duty taxes on alcohol and tobacco
The general cost of living
How is RPI calculated?
The Office of National Statistics (ONS) calculates the RPI by putting together a “shopping basket” of over 700 consumer products and services and tracking the average price year on year. The specific goods and services change over time to reflect contemporary spending habits. It also takes the cost of mortgage payments into account, making it heavily influenced by house prices and interest rates.
What is the CPI?
The Consumer Price Index is similar to the API and calculated in a similar way. However, it takes slightly different consumer costs into account. The CPI was first introduced in 1996 as the Harmonised Index of Consumer Prices (HICP). It was introduced to create statistical parity with other EU countries and has been the official measure of inflation even after the UK left the EU.
How is the CPI calculated?
CPI is calculated in a similar way to RPI, measuring over 180,000 prices on the same 743 consumer items and comparing the average price to that of the previous year. However, it does not include housing costs as the RPI does.
A significant number of financial items are linked to CPI including:
Statutory sick pay
Personal independence payments for disabled people
State and public sector pensions
What is CPIH?
The CPIH is the Consumer Price Index including owner occupiers’ housing costs. It uses an approach called “rental equivalence” to determine the costs that renters pay on equivalent properties to those occupied by their owners.
Why are both RPI and CPI important for tracking inflation?
Although RPI is now considered a legacy measure of inflation, it behoves business leaders to keep track of both the RPI and CPI. Both are used to track inflation using slightly different data. As such, RPI tends to calculate a higher rate of inflation than the CPI. For instance, in May 2023 the RPI was 11.4% while the CPI was 8.7%.
Nonetheless, both can be useful in pre-empting the cost of doing business as well as the spending power of consumers.
Retail Price Index FAQs
Is RPI an official measure of inflation?
No, it was replaced by the CPI in 2003. It is considered a legacy measure as its formula has not been updated or corrected and tends to overestimate real terms inflation.
What is the difference between RPI and CPI?
While both measures of inflation are calculated in similar ways, RPI is calculated using items that are not included in CPI such as mortgage payments
Why does RPI matter to my business?
Though it remains a legacy measure of inflation, RPI is still worth tracking for businesses as it influences a wide range of items that affect not only business costs but the spending power and confidence of consumers.