Public and Commercial Services Union

There are a number of inflation measures both for consumers and corporations. The three that are dealt with here are the Consumer Prices Index (CPI 4.7%), the Chancellor’s preferred index, its European equivalent the Harmonised Index of Consumer Prices (HICP 4.4%) and the Retail Price Index (RPI 4.8%). They are all a measure of changes in the costs of a representative basket of goods and services.

Traditionally the key difference between these measures is that CPI is the UK harmonised inflation index and does not include housing costs such as mortgage interest and council tax.

Retail Price Index (RPI)

RPI is the UK’s traditional inflation measure and measures retail price increases including owner occupier’s housing costs. It has a domestic market focus. It is more commonly used in pay bargaining.

Consumer Prices Index (CPI)

The CPI is harmonised to European measures (HICP) and that overall European figure currently stands at 4.4%. It often has a similar rise to the RPIX figure (RPI excluding mortgages) that currently stands at 5.2%.

It is usually lower than other measures, as housing often drives the RPI but currently prices are rising due to other pressures. This little known measure is used for pay bargaining for PCS members in Capita.

Differences between CPI and RPI

The RPI focuses on the core UK population excluding the top 4% income and those pensioners who rely on benefits; the CPI includes all private households including foreign visitors and students.

The commodity baskets also differ for example, the CPI and RPI treat transport differently. The RPI looks at buying a motor vehicle, maintaining it, tax and insurance, petrol and oil as separate items, the CPI looks at the purchase of a new or second hand car or motorbike, then insurance under a separate item, Whatever the index costs are rising and it is important for pay rises to keep pace.

The current situation

Whatever measure is used prices are rising. Inflation figures for August published on 16th September show that gas prices soared by 27.7%, electricity 18%, while fuel and lubricants decreased. Food inflation was 14.5% due to a rise in breads and cereals. Toilet rolls and hairdryers are also contributors to inflation this month.

The Bank of England letter to the Chancellor commented that the signs were that inflation would remain high well into 2009 when it will fall sharply. The Governor of the Bank of England claimed that the problems were global and that muted economic growth is necessary to bring inflation down, therefore the Interest rate level will be set accordingly. This means interest rates are not likely to come down soon.