RPI stands for the ‘Retail Price Index’. It was first introduced as an official measure of inflation by the UK government in 1956. Before then, the government used two different measures of inflation. The first, the Cost of Living Index, was in use between 1914 and 1947. The second, The Interim Index of Retail Prices, was used between 1947 and 1956. For simplicity, all three of these are commonly referred to as RPI.
Today’s RPI is calculated each month by the Office of National Statistics (ONS). It is done by pricing up a representative basket of current goods and services and then dividing the figure by the number of items (resulting in an average, or arithmetic mean). By comparing one month’s RPI to another, it’s then possible to calculate increases or decreases in inflation.
The goods and services in the RPI basket are changed annually, but they are very broad ranging. For example, the 2022 RPI includes hundreds of food items, as well as services that range from mobile phone contracts and playgroup fees to car servicing and online gaming subscriptions.
RPI is also heavily influenced by housing costs. This is because it includes items such as private and social rents, along with mortgage interest payments. This is one reason why RPI tends to overstate inflation when compared to other measures such as CPI (see below). This is particularly true when house prices and interest rates increase rapidly.
Although RPI is still compiled monthly by the ONS, it is no longer classified as a ‘national statistic’. In a 2018 press release, the ONS said: “Our position on the RPI is clear: we do not think it is a good measure of inflation and discourage its use.”
That said, RPI is still used for a wide range of purposes. We’ll cover these a little later in this article.