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CPI and RPI: what’s the difference between ONS indexes - how UK inflation rate is measured amid budget squeeze

The worst cost of living crisis for 40 years is currently engulfing the UK, according to the Office for National Statistics (ONS)

The UK’s cost of living crisis has become the worst for 40 years, the Office for National Statistics (ONS) has revealed.

Inflation, as measured by the Consumer Prices Index (CPI), hit 9% in April 2022 - a rise of 2% month-on-month.

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This figure is the highest CPI on record, as well as the highest inflation rate since 1982, and shows price rises are currently outpacking wage growth.

Meanwhile, the Retail Prices Index (RPI) has risen to 11.1%.

But what’s the difference between these two yardsticks for inflation - and why are both still published by the ONS?

Here’s what you need to know.

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How does the ONS measure inflation?

Inflation is an economic term used to describe price rises for goods and services in a country over a particular period of time.

The rate of these increases can vary based on a number of factors.

Rocketing rates of UK inflation are denting consumer spending power (image: Shutterstock)

For example, if energy costs are high - as they currently are after the increase to the Ofgem energy price cap - the price of producing a particular item will go up.

In turn, this production cost rise is then likely to increase the product’s shelf price, meaning it has undergone price inflation.

The ONS gives more weighting to products seen as integral to households in its ‘basket of goods’ (image: Shutterstock)

Every month, the ONS gauges whether prices are inflating or deflating by looking at roughly 180,000 prices for around 700 everyday items - it’s so-called ‘basket of goods’ in 140 locations across the UK.

It then compares the current average price of these goods with the average it measured the previous year.

So, the 9% increase measured by the CPI, means goods are priced 9% higher than they were 12 months ago.

Translated into real terms, a product that cost £1 on average last year, cost £1.09 on average in March 2022.

Inflation statistics help consumers to determine how far their household budgets will stretch (image: Shutterstock)

These statistics not only help the Government to set the level of, among other things, state benefits, but it also helps UK households to appraise how far their budgets will stretch and when they should make major purchases.

However, the ONS takes two slightly different approaches in how it expresses price inflation.

What is the CPI index?

The CPI index is a measure of inflation measured solely using the ONS’s ‘basket of goods’.

For example, meat-free sausages, sports bras and antibacterial surface wipes have been added for 2022, while men’s suits and doughnuts have been removed.

This basket is weighted so that goods which are more important to households, such as milk, have a greater influence over the index overall than items that are less integral to daily life.

The RPI is more influenced by house prices and interest rates than the CPI (image: Shutterstock)

These weightings also change over time as shopping habits change or new products move into the mainstream.

CPI is used by major economies across the globe and was formally adopted by the UK in 1996.

As the official measure of inflation, it helps to determine the state pension, state benefits and statutory sick pay.

What is the RPI index?

The RPI index essentially does the same job as the CPI but typically tracks slightly higher.

Its main point of difference is it includes mortgage interest payments, so it is more influenced by house prices and interest rates than the CPI, which does not.

It’s actually not used as an official measure of inflation by the Government because the method of calculating it is seen as inferior to CPI.

But it is still used to determine prices in some areas of public life, such as train tickets and alcohol duty.

The reason why it continues to be calculated is that it has been running in the UK throughout the 20th century and therefore provides a longer term yardstick for inflation.