Retail Price Index

Retail Price Index (RPI) Definition

Retail Price Index (RPI) is an unofficial inflation indicator published by the United Kingdom’s Office for National Statistics (ONS). It evaluates the difference in the monthly prices of specific retail goods and services to measure inflation. It is basically used for uprating wages, rents, pensions, index-linked gilts, etc.

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 Index (CPI) has replaced it as a national inflation statistic over the years.

• 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.

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.

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: 

• Food
• Alcohol
• Apparel & footwear
• Furniture
• Car
• Light & fuel
• Housing costs
• Tobacco
• Personal items and services
• Audio-visual equipment
• Leisure services and products
• Household 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 mean 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 change in each price first and then takes the arithmetic average of these variations.

where I_t,0 is the price index, n is the number of price quotes and p_i,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.

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

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:

1. Annotators and statisticians in business, academia, and government
2. Think tanks and voluntary department
3. Media
4. General populace
5. Debt management office
6. National Savings and investments
7. Her Majesty’s (HM) revenue and customs
8. Member institutions of the UK Regulators Network (UKRN)
9. Private sector firms
10. Student loans company
11. Landlords

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 year 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)

Particulars	RPI	CPI
Definition	Inflation gauge to calculate the monthly price variations in retail goods & services together with housing costs	Inflation gauge to determine the price variations in basic goods & services excluding housing costs
Status	Unofficial statistic	Official statistic
Launched in	1947	1996
Goods included	- Council tax - Mortgage interest payments - Buildings insurance - House depreciation - TV license - Homeowner costs - Trades union subscriptions - Road fund license	Goods excluded by RPI like: - University accommodation costs - Stockbroker rates - Unit trust charges - Foreign student tuition fees
Calculation method	Arithmetic mean	Geometric mean
Average rate	Relatively higher	Relatively lower
Users	- Debt management office - National savings & investments - Member institutions of the UKRN - HM Revenue & Customs - Student loans company - Think tanks and voluntary department	- Bank of England - UK Government of England - Scottish Parliament for Scotland - National Assembly for Wales - HM Revenue & Customs - Department for Work & Pensions Housing associations
Inflation rate (Jan 2022)	7.8%	5.5%

For more details, have a look at this article - RPI vs CPI

Frequently Asked Questions (FAQs)

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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 - 

• WPI vs CPI
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