Retail price index (RPI)

Retail price index (RPI)

The Retail Price Index (RPI) is one of the two main measures of consumer inflation produced by the United Kingdom’s Office for National Statistics (ONS). Thus, most of the information is based on the UK.  

The term “inflation” refers to a sustained rise in the price of goods and services throughout an economy. Thus, a rise in inflation would suggest a decline in the currency’s purchasing power. Inflation is calculated using a variety of metrics, such as the Retail Price Index (RPI). The retail price index tracks the change in average prices over a specific period. A hypothetical shopping cart called the “Basket of Products” represents the important goods and services individuals are expected to purchase. 

What is RPI? 

The retail price index (RPI) is an unofficial measure of inflation that analyses the variation in monthly prices for retail items and services to calculate inflation. It is known as the consumer price index (CPI) in the USA. It is published monthly by the Bureau of Labour Statistics (BLS). The RPI is based on the prices of a representative sample of retail goods and services. 

The RPI is determined as an arithmetic mean to determine how much different daily-use products and services cost. It mostly increases salaries, rent, pensions, index-linked gilts, and other costs. 

Understanding RPI 

The RPI, a more traditional measure of inflation, is still reported because it determines the cost of living and wage growth. Still, it is not regarded as the government’s official inflation rate. RPI was initially calculated for June 1947, replacing the earlier Cost of Living Index. It once served as the primary official indicator of inflation.  

The RPI is important because it adjusts government benefits and pensions for inflation. It is also used by businesses to make decisions about prices and wages. It is still used to determine how much social housing rent, pensions, wages, interest rates on index-linked gilts, student loan rates, and other yearly costs rise.  

Nonetheless, the Consumer Price Index (CPI) now serves as the official replacement as a gauge of inflation recognised nationally. The ONS assessed RPI data following the Statistics and Registration Service Act of 2007 and the Code of Procedure for Official Statistics.  

As a result, it was revealed that RPI needed to be more effective in upholding the current state of the National Statistics. CPI was thus formally chosen as the inflation indicator. Due to its use in long-standing contracts tied to inflation, the RPI remains the most widely used indicator despite its status. RPI data is never altered after it has been published. 

History of RPI 

The Interim Index of retail prices, used since June 1947, was replaced by RPI in 1956. It once served as the primary official indicator of inflation. The CPI has returned it in that sense. The government continues using the RPI as a benchmark for several calculations, including the amounts due on index-linked instruments, such as gilts and rent increases for social housing. It’s also a common place for companies to negotiate.  

Since 2003, the government has employed neither the inflation objective for the Bank of England’s Monetary Policy Committee (BEMPC) nor the foundation for indexing former public sector employees’ pensions. Since 2016, the UK’s state pension has been indexed by the higher CPI or 2.5% growth in average wages (“the triple lock”). 

Recently, the ONS proposed certain changes to the RPI framework. The common budgetary actions taken in the fiscal year that ends in 2023 may lower the yearly RPI rate by 0.09% because the monthly rate changes for the fiscal year ending in 2023 (0.12) will be balanced out by the monthly rate deviations for the fiscal year ending in 2022 (0.03). Remember that the RPI rate increased 6.4% over the previous 12 months, from 1.4% in January 2021 to 7.8% in January 2022. 

Formula of RPI 

The USA’s RPI is calculated using a formula that considers the prices of a representative basket of goods and services. The basket of goods and services is updated periodically, and the RPI is calculated using data from the previous month. The basket of goods and services is divided into eight categories: food and beverages, housing, apparel, transportation, medical care, recreation, education, and others. 

Prices are collected for a representative sample of items in each category. The weights are then applied to the price changes for the items in the sample to arrive at the RPI. 

Calculation of RPI 

RPI is calculated by the BLS and is released monthly.  

Frequently Asked Questions