Consumer prices index, CPI, is the government's preferred measure of inflation.
It is used by the UK Government to set an inflation target for the Bank of England Monetary Policy Committee. It corresponds with inflation measures used in other European countries, and is sometimes called Harmonised Index of Consumer Prices(HICP).
All EU countries introduced an HICP after the Maastricht Treaty to assess whether prospective members of European Monetary Union
would pass the inflation convergence criteria. It is available as an index from January 1997, with estimates back to 1988. As of the 2010 budget, CPI is used to index state pensions in place of RPI (currently as part of the triple-lock).
CPIH is CPI plus owner-occupied-housing-costs and council tax.
An updated CPIH was launched in February 2017 with estimates back to 2005.
It is promoted by the Office for National Statistics(ONS) as 'the most comprehensive measure of inflation'.
Since 2008 inflation of mortgage-payments, has sometimes been less than CPI inflation, so CPIH has sometimes been lower than CPI.
Roughly 10% of CPIH is owner-occupied-housing-costs.
Retail Price Index, RPI, is a familiar and long-established measure of cost-of-living in the UK.
It includes mortgage interest payments and council tax. But since 2010 it has been overstating inflation.
In 2012/2013 statisticians at the Office for National Statistics confirmed that the formula used to calculate parts of the index had overstated inflation. Despite this RPI is still used in some wage agreements, commercial lease agreements, regulated rail fares and index-linked government bonds.
Many final salary pensions are linked in-full or in-part to RPI. Since 2012 student loan interest rates have been linked to RPI.
Back in January 2015, the Institute for Fiscal Studies, a research organisation not linked to the
government, estimated that indexed-linked bonds were costing the taxpayer an additional £2bn per year because they use RPI instead of CPI. On July 20, 2017 Chris Giles Financial Times economics editor reported there are £407bn index-linked government bonds
linked to the RPI. Apparently for 94% of UK index-linked bonds there is nothing which says the Government cannot change the index to which
they are linked. If RPI were abandoned the bond-holders must accept "an officially recognised index measuring changes in the level of UK
retail prices", for example CPI. For the remaining 6% which were sold before 2002, the government would have to inform the bond-holders and offer to
redeem their stock at par.
The market value of these issues is £67bn and the redemption value is £49bn. So nothing much would happen. On January 30 2018, then Bank of England governor Mark Carney speaking to a House of Lords economic affairs committee called for
a "deliberate and carefully timed" withdrawl of RPI from use in government contracts because "most would
acknowledge the RPI has no merit".
Index-linked bond contracts link their annual uplift to the RPI and the ONS is obliged by law
to produce the index every month, the only named statistic British law requires the ONS to produce. In September 2019, then Chancellor Sajid Javid announced a plan to change RPI to move it lower, in line with CPIH, by 2025-2030.
The announcement caused the price of some index-linked bonds to fall 10%.
In February 2020, economics correspondent, Tommy Stubbington, reported in the FT that more than one-quarter of
UK's public debt is inflation-linked, double the proportion in any other large advanced economy. Pension funds are keen on index-linked bonds because they match their liabilities which are often tied to inflation.
The reform would save the taxpayer £2bn per year but bond-holders and pensioners on RPI-linked benefits would lose out.
A lower RPI would tame rising prices for rail tickets and student loan repayments. On Wednesday 25.11.2020, as part of a Covid-delayed Autumn Statement, Chancellor Rishi Sunak announced the UK
will stop using RPI in 2030.
For different dates on the chart:
Please make End-Year five or more years greater than Start-Year