Differences Between CPI vs RPI
Inflation represents the increase in the price level of the goods and services in an economy accounted for over a period of time. The rise in inflation would indicate that the purchasing power of the currency is declining. The Reserve Bank strives to control the inflation by raising the policy rates such as the Repo Rate vs Bank Rate, Cash Reserve Ratio, and the Statutory Liquidity Ratio. Various measures are used for calculating inflation such as Consumer Price Index (CPI), Wholesale Price Index (WPI), Producer Price Indexes (PPI), Retail Price Index (RPI) and so on. In this article, we discuss the differences between CPI and RPI
#1 – Consumer Price Index (CPI)
CPI measures changes in the prices of goods and services purchased by households for consumption. The five broad components of CPI involve Food Beverages and Tobacco, Fuel and Light, Housing, Clothing bedding, and footwear, miscellaneous. The prices of the representative items are collected at regular intervals and used for computing the index. CPI can also be used to index the real value of salaries, wages, and pensions to gauge the increase in price. The RBI widely uses CPI numbers as a macroeconomic indicator of inflation and for the purpose of supervising the price stability.
#2 – Retail Price Index (RPI)
RPI was introduced by the Office for National Statistics in the UK in 1947 as a measure of inflation for the purpose of evaluating the prices of retail goods and services. The UK government utilizes RPI for some purposes like working out the amounts payable on index-linked securities (including the index-linked gilts) and the increase in the social housing rent. RPI also takes into account housing costs such as mortgage interest payments, building insurance etc.
CPI vs RPI Infographics
Here we provide you with the top 7 differences between CPI and RPI
CPI vs RPI Key Differences
We will get more clarity on the subject matter by reading about the differences between CPI vs RPI in detail.
- Consumer Price Index is the change in the prices of goods and services consumed by households with reference to a base year. RPI is the measure of consumer inflation which accounts for the changes in the retail prices of the representative basket of goods and services.
- CPI was introduced after the First World War period when there was a significant rise in the prices. The workers demanded compensation on the backdrop of the decline in the real wages and escalation of the cost of living. The Cost of Living Index Numbers was changed to Consumer Price Index after July 1955. The RPI was introduced in the UK in 1947 and had replaced the earlier Interim Index of Retail prices. However, since 2013, the Office for National Statistics has been focusing on the usage of CPI instead of RPI as an official measure of inflation.
- The major difference in the components is that RPI includes housing cost such as housing depreciation, road fund license, council tax, mortgage interest payments etc. However, CPI does not include such housing costs.
- CPI applies the geometric mean for computing the variation in the prices. RPI uses the arithmetic mean where the number of items is divided by the total of the prices for computation.
- The national statistical agencies calculate CPI after classifying the consumption components into categories. These categories are on the basis of the type of consumers – rural and urban.
- RPI is calculated after giving weights to the components as per the level of relevance. The price of each component is multiplied by the respective weight. The base year selected acts as the standard against which the variations in the current prices are evaluated.
- CPI is used widely used as an economic barometer of inflation in many nations. Hence, CPI has more fundamental relevance as compared to RPI.
CPI vs RPI Head to Head Differences
Now, let’s look at the head to head differences between CPI and RPI
| Basis of Comparison between CPI vs RPI | Consumer Price Index (CPI) | Retail Price Index (RPI) | ||
| Definition | CPI measures the weighted average prices of the basket of goods and services consumed by households. | RPI is a measure of consumer inflation which considers the changes in the retail prices of a basket of goods and services. | ||
| Components | The market basket involves Food Beverages and Tobacco, Fuel and Light, Housing, Clothing bedding, and footwear, miscellaneous. The dearness allowance of government employees and wage contracts is also included. | RPI calculates the variations in the cost of the basket of retail goods and services. RPI also accounts for housing costs such as mortgage interest payments etc. | ||
| Date of Introduction | The introduction of the CPI was after the First World War period when there was a significant rise in the prices. | RPI had been introduced in the UK and was first calculated in 1947. | ||
| Housing Cost | The cost of housing is not included while computing the index. | Housing cost such as mortgage interest payments, insurance of the building etc is included. | ||
| Use of Mean | The geometric mean is used | Arithmetic mean is used | ||
| Macroeconomic Relevance | CPI acts as a significant tool for monitoring price stability and is used extensively as a barometer of inflation. | RPI is not used for measuring the inflation target by the Monetary Policy Committee of the Bank of England. | ||
| Size of the Population | The population size considered is large. | The population size considered is comparatively lower than CPI. |
Conclusion
CPI and RPI indicate the changes in the prices of goods and services as compared to the standard prices of the base year. The calculation method differs as the geometric mean is used in CPI whereas the arithmetic mean is used in the calculation of RPI. RPI includes housing cost such as the mortgage interest payments which is not in the case of CPI computation. CPI is considered to be a lead indicator of inflation and thus has more relevance as compared to RPI.
RPI of the UK for September 2018 has been reported at 3.3% as compared to 3.5% in August 2018. In September 2018, CPI of India rose to 3.77% due to the rising prices of food and other goods and services. The RBI has restated that the target of consumer inflation is 4% and has kept the Repo rate unchanged at 6.5% in the recent credit policy announced on 5th October 2018. Some of the concerns with respect to rising inflation are elevated oil prices, an increase in the minimum support prices (MSP) and volatility in emerging markets.
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