The CPI and RPI are used to measure inflation in economics, with the former monitoring a standard set of household items and the latter potentially including housing costs. Different organizations use them for economic decisions, and their calculation methods differ. RPI typically shows a higher inflation rate than CPI, and arguments about accuracy are common among experts.
In economics, the consumer price index (CPI) and the retail price index (RPI) are used to measure and monitor inflation. RPI and CPI are usually 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, known collectively as the 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 main connection between RPI and CPI, however, is their use in making economic decisions based on past and present market conditions.
Different organizations use RPI and CPI differently depending on geography, common cultural practices, government regulation and what economic decisions need to be made. Some organizations, such as government agencies, use the CPI to determine economic policy and define government benefit amounts. Other organizations, such as corporations, use the RPI to make investment recommendations or determine retirement benefits for retirees. Likewise, some organizations use both numbers, opting for one over the other depending on the economic decision at hand. For example, the government in the United Kingdom bases benefit payments on CPI values, but bases rates of taxation and taxes on RPI values.
Although the RPI and CPI are used to measure inflation in a given economic area, the methods for calculating the rate of increase or decrease are different. The formulas used to calculate the RPI are typically simple arithmetic formulas based on the average. All items used in the basket are added up and divided by the total number of items. Alternatively, calculating the CPI involves a more complex approach known as geometric averaging. This approach uses multiplication and root values to achieve an average result, expressed in percentages.
Typically, RPI calculations show a higher inflation rate than CPI numbers. According to economic experts, the average difference between RPI and CPI is approximately one percent. If the CPI were calculated using the same formula as the RPI, for example, the CPI results would typically be about one percent higher than the results using average geometric formulas. Likewise, if the RPI were calculated using the geometric mean, the results would typically indicate a lower inflation rate than results calculated using the arithmetic mean.
Arguments about the difference in accuracy rates between RPI and CPI are common among economic experts. Many argue accuracy based on what items are used in the RPI and CPI. Still others argue accuracy based on the formulas used to calculate each figure. Few countries regulate which cipher companies must use, although many governments officially declare which method is used to make public policy decisions.
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