The UK is in the midst of a major cost of living crisis driven by record inflation, high interest rates, and the country’s faltering economy.
The first of these, inflation, has seen price rises across the economy reduce the spending power of UK households by the biggest amount in more than 40 years. The headline rate of inflation - the Consumer Prices Index (CPI), which is calculated by the Office for National Statistics (ONS) - shows prices rose an average of 10.4% in the year to February 2023.
While this figure is below a record high recorded last October, it still means the cost of living is getting more expensive. Everything from energy bills, food prices and the cost of a tank of petrol have soared since 2021, mostly as a result of the Russia-Ukraine war. The conflict has limited the UK and Europe’s access to gas, oil and other vital commodities. Brexit and Covid supply chain disruption have also played a part in soaring prices.
Economists say inflation will reduce over the course of 2023, and Rishi Sunak has set his government a target of cutting the rate of price rises this year (although this pledge is mostly outside of the government’s control). However, while inflation is falling, there is concern about the cost of living gap that has emerged between the UK’s richest and poorest people. Research by think tank the Resolution Foundation has found the poorest tenth of people were experiencing inflation of 12%, compared to 9% for the wealthiest tenth.
As well as a rise in the CPI, another tool the ONS uses to measure hikes - the Retail Price Index (RPI) - has also a hike in the rate of prices rises of 13.4% year-on-year. So why does the ONS publish two measures of inflation - the CPI and RPI - and what do these indexes show?
How does the ONS measure inflation?
Inflation is an economic term used to describe price rises for goods and services - and therefore, the spending power of money - in a country over a particular period of time. The rate of these increases can vary based on a number of factors.
For example, if energy costs are high - as they currently are - 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.
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 10.4% increase measured by the CPI for February 2023 - a 1.1% rise on January 2023’s figure - means goods are priced 10.4% higher than they were 12 months previosuly. Translated into real terms, a product that cost £1 on average in January last year, cost just over £1.10 in January 2023. It’s also worth noting that last February’s inflation rate was also relatively high at 6.2%, so the latest rate is coming on top of what were already significant price hikes.
These statistics are not only used by the government to set the level of state benefits, among other things, 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’ - a list of items deemed to be central to UK daily life, which is updated every year to reflect changing shopping habits.
For example, meat-free sausages, sports bras and antibacterial surface wipes were added in 2022, and E-bikes, home security cameras and frozen berries have just been added for this year. Casualties from the 2023 basket of goods include alcopops, digital compact cameras and CDs that are not in the UK Top 40.
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. 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 - rates that tend to be determined by the September CPI.
What is the RPI index?
The RPI index essentially does the same job as the CPI but typically tracks slightly higher. In October 2022, it hit a record high of 14% but has since fallen to 13.8% - although this rate is above the 13.4% recorded in January and December.
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 phone contracts. 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.