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Economics explained


Inflation and deflation

The CPI versus the RPI

The CPI versus the RPI

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The CPI versus the RPI

Both the consumer price index and the retail price index (RPI ) can be used to calculate the rate of inflation.

There are three key differences to these price indices:

The items included in the calculations

The main difference is that the RPI includes the cost of housing, such as mortgage interest payments and other housing costs. The RPI also includes overseas expenditure by domestic. households. The CPI includes costs paid for financial services.

The population base

Both price indices try to measure changes in the cost of living for the average household. However, the RPI excludes low-income pensioner households and very high-income households, as it is argued that these do not represent the 'average' household or the expenditure of the average family.

The method of calculation

The RPI is calculated using the arithmetic mean whereas the CPI uses the geometric mean. What this means is that the RPI tends to be lower than the CPI (unless interest rates for mortgage repayments are extremely low).

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