Definition of consumer price index
The consumer price index (CPI) and the retail price index (RPI) are both measures of the price of goods and services used to estimate inflation. There are international standards set for inflation measures and the CPI complies with the European standards, while RPI does not.
The main differences are that the CPI uses a basic calculation method seen as superior, but it does not measure the cost of owner-occupied housing. In March 2013 a new measure CPIH will include estimates for the cost of owner-occupied housing using private rent levels as a proxy, while the RPI uses average mortgage interest payments to estimate the costs of home ownership. The CPI is inclusive of VAT, and other taxes, and as such can change as a result of changes in taxation levels.
The UK government's stated policy is to use the consumer price index (CPI) for the indexation of benefits, tax credits and public service pensions, whereas it would use the retail price index (RPI) for the uprating of index-linked gilts and revalorisation of excise duties.
Consumer price index (CPI) in the news
In 2011, the UK government controversially decided to switch from the retail price index (RPI) to the consumer price index (CPI) for the uprating of benefits and public sector pensions. Unions argued that this was because CPI was consistently lower than RPI. In March 2012, Qinetiq, the privatised UK defence technology contractor, was permitted by a High Court ruling to retroactively apply a switch from RPI indexation to CPI indexation for its pension schemes.