Do you know your CPI from your RPI?
How about CPIH? And where do RPIX and the many others fit in? It’s no wonder that the world of inflation measures can seem confusing when there are so many different indices out there.
The situation is made worse when the government quite obviously picks and chooses between them for different purposes.
Typically, when it pays out (e.g. benefits and pensions) it uses CPI (consumer price index) for the annual uprating. Yet when it wants to take money from us (e.g. rail fares, student loans and air passenger duty) it uses RPI (retail price index), which has historically shown a higher inflation rate, even though it is now a discredited index. (Indeed, its technical shortcomings mean that it has long been stripped of official “National Statistic” status.)
This is, quite simply, cynical conduct and a scandalous state of affairs. So what can be done?
Some argue that it would be much simpler and fairer to have a single inflation rate instead, to reduce confusion, and also stop the government from switching between rates at its convenience.
This idea is inviting on the surface. However, while we at the Royal Statistical Society (RSS) think the system needs an overhaul, we believe that Britain still needs two inflation indices.
There are two key purposes to an inflation index. First, you need a macroeconomic index, to help set interest rates. This is what the CPI has been created to do. It is based on an EU methodology and is comparable with other European countries’ practices.
Second, you need a more domestically focused index which tracks households’ experience of changing prices. Despite its other merits, CPI fails to do this properly. It is weighted towards wealthier households rather than tracking typical expenditure patterns.
It also misses out on loan interest and the full cost of insurance premiums, while failing to fully monitor expenditure on our national love affair – housing. Even its derivative, CPIH (consumer price index including housing), does not do this directly, but uses rental equivalents.
We need, instead, a measure that considers actual mortgage payments and other house purchase and renovation costs.
The RSS has duly called for the development of a new measure: a Household Inflation Index (HII), which would help us all understand how price changes are affecting people’s actual lives. This would be ideal for the government to use as the main uprating index, right across the board – covering both people’s benefit and pension incomes, and their rail fare, student loan and other outgoings.
The Office for National Statistics is to be congratulated as it is now looking into creating a measure of this sort.
Policymakers and journalists may long for the ease of a single measure of inflation. But, statistically, one inflation index couldn’t answer the two questions we would need to ask of it. The analysts at the Bank of England need a CPI to help them set interest rates. But that index won’t tell us about people’s actual experience of price changes, as it is both too skewed and insufficiently comprehensive.
This is the reason for a complementary HII.
We should remember the aphorism: “everything should be made as simple as possible, but not simpler”. It might be tempting to cut away the many confusing inflation acronyms to create a single index, but it would also be an error. I’m not usually prone to quoting Taylor Swift, but as she has so eloquently put it, “I’m thinking two is better than one”.
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