Definitions
Coverage RPI The RPI covers a range of costs excluded from the CPI, including:
• Mortgage interest payments (MIPs)
• Council tax
• House depreciation
• Buildings insurance
• House purchase costs, e.g. estate agent fees
• TV licence
• Road fund licence
• Trades union subscriptions
The RPI includes a price index for cars which is based entirely on used car prices.
Coverage CPI The CPI covers certain charges and fees excluded from the RPI, including:
• Stockbroker fees
• University accommodation fees
• Foreign student tuition fees
• Unit trust fees
The index for the purchase of new cars in the CPI is quality adjusted and based on actual published prices for new cars.
RPI The RPI is representative of the majority of private UK households, but excludes the highest earners and pensioner households dependent mainly on state benefits. It includes expenditure both within the UK and abroad by UK households. Expenditure data (or ‘weights’) used to represent this population are derived from a number of sources but mainly from the Office for National Statistics (ONS) Living Costs and Food Survey.
RPI Calculation At the first stage of aggregation, the RPI is constructed using an arithmetic mean (AM). There are two different methods, applied to different items but, for example, the AM would be calculated as follows; if one price increased by 25% from the base period (which=100) and another decreased by 20% their new index values would be 125 and 80 respectively. The AM of these is; (125+ 80)/2 =102.5 indicating an ‘average’ price increase of 2.5%.
CPI The CPI is representative of all private UK households, and also includes the expenditure of institutional households (nursing homes for example) and foreign visitors to the UK. Only expenditure within the UK is covered. Expenditure data (or ‘weights’) used to represent this population are derived from National Accounts data and can therefore differ in magnitude from the RPI weights for similar components.
CPI Calculation At the same level (as RPI), the CPI uses a geometric mean (GM) which, taking the values used in the adjacent example is calculated thus, sqr(125*80) = sqr(10000) =100 , indicating that there has been no change in prices. An advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services.
The definitions above are as stated by Government and were available through a link I had on this page but they have completely changed the ONS site. The definitions are now obtainable as a file “Implications of the differences between the CPI and RPI” to be downloaded and read in Adobe Reader.
I find the last sentence in the paragraph CPI Calculation hard to believe as it clashes with my experience and no justification is offered. On the BBC there was a mention that with inflation people would change to cheaper products. This is not possible when pensioners are already buying only the cheapest. It appears more likely that it is used as a mathematical trick to reduce the index. From this it is clear to me that the CPI data bears little relationship to inflation for pensioners. This is emphasised on the third page of the publication where the effects of the weightings in CPI are all negative which ensures that in virtually all circumstances the value of CPI will be less than RPI.
