Inflation? Which Inflation

We all know that inflation is rising – largely because sterling has fallen against other currencies, making imports more expensive.  We import quite a lot so it adds a fair bit to the average inflation rate.  But which inflation rate?  There’s RPI – the retail prices index; CPI the – consumer price index and now a new one CPIH – consumer-prices index including owner-occupiers’ housing costs. What are they for and why do they differ? And which one is most accurate?

 

RPI is the oldest measure, but it doesn’t capture the real inflation that people feel very well and reports a higher figure than the newer, more sophisticated measures.  That benefits pensioners whose pensions are uprated at least in line with RPI.  It’s not so good for rail users though as their fares are also linked to it.

 

What about CPI then? This is the measure used by the Bank of England for inflation targeting. The Monetary Policy Committee has a target of getting CPI to 2%.  If it is more than 1% away from this – either way- the Governor of the Bank of England has to write to the Chancellor to say why. But CPI has its flaws too because of housing.  It includes rent in its calculations, but not ownership costs such as estate agents’ fees or mortgages.  These add up to over 15% of household spending – quite a big thing to leave out. So that isn’t the real feel of inflation either.

 

That leaves us with the newest measure CPIH, which does include the costs of owning a home and should be closer to the ‘real feel’ of price rises and could become the one to watch.  In reality everyone has their own individual inflation rate, depending what they prefer to spend their money on, and without a series for everyone there will never be an exact measure of the rate of inflation for everyone – just an average for the whole of the country.