The CPI and RPI are used to measure inflation in a specific area, with the RPI including housing costs. Different organizations use them differently, with the UK government using the CPI for benefit payments and the RPI for taxation. The methods for calculating them are different, with RPI typically showing a higher rate of inflation. Accuracy is debated among experts.
In economics, the consumer price index (CPI) and retail price index (RPI) are used to measure and monitor inflation. RPI and CPI are typically calculated for a specific country or region and may have a different common name, although the concepts are present in most modern economies. With CPI, a standard set of items purchased by the typical household, collectively known as a basket, is monitored for price fluctuations. Comparatively, the RPI uses many of the same items, but may also include the cost of housing or other items not found in the CPI. The primary connection between RPI and CPI, however, is their use in making economic decisions based on past and present market conditions.
Different organizations use the RPI and CPI differently, depending on geography, common cultural practices, government regulation, and economic decisions being made. Some organizations, such as government agencies, use the CPI to determine economic policies and set government benefit amounts. Other organizations, such as businesses, use the RPI to make investment recommendations or determine retirement benefits for retirees. Similarly, some organizations use both figures, opting for the other, depending on the business decision at hand. For example, the UK government bases benefit payments on CPI figures, but bases taxation and tax rates on IRP figures.
While both RPI and CPI are used to measure inflation in a particular economic area, the methods for calculating the rate of increase or decrease are different. The formulas used to calculate RPI are usually simple arithmetic formulas based on the mean. All used items in the cart are added, then divided by the total number of items. Alternatively, calculating the CPI involves a more complex approach known as the geometric mean. This approach uses multiplication and root values to arrive at an average result, expressed as a percentage.
Typically, RPI calculations show a higher rate of inflation than CPI figures. According to economic experts, the average difference between RPI and CPI is about one percent. If CPI were calculated using the same formula as RPI, for example, CPI results would typically be about one percent higher than results using geometric mean formulas. Similarly, if RPI were calculated using the geometric mean, the results would generally indicate a lower rate of inflation than results calculated using the arithmetic mean.
Arguments regarding the difference in accuracy rates between RPI and CPI are common among economic experts. Many argue for accuracy based on what elements are used in RPI and CPI. Still others argue for accuracy based on the formulas used to calculate each digit. Few countries regulate the figure that companies must use, although many governments officially state which method is used to make public policy decisions.
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