Consumer Price Indices in the UK

Abstract

Since the British government started using the Prices Index (CPI) for some uprating purposes in 2011, there has been a proliferation of consumer price indices in the UK – nine at the last count with some claim to apply to the population at large. Leaving to one side their possible use as monetary policy indicators, this paper provides a review of the available consumer price indices and assesses their suitability as uprating indices, in the light of recent theoretical and empirical research.The main focus is on the CPI and the Retail Prices Index (RPI), since the other indices all derive from one or other of these two. The conclusion of the paper is that, taking account of both coverage and formula effect differences and within the limitations of how price data is collected within the UK, the RPI is as good a consumer price index as one can get for uprating purposes. The systemic differences between the RPI and the CPI are the result of under-estimation by the CPI.There are implications for other countries as well. The flurry of recent research in the UK has led to a consensus that the Economic Approach, which had been thought to provide at least weak support for the use of the Geometric Mean for elementary aggregation, in fact does not do so. There is, therefore, a need for a revision to the ILO's Consumer Price Index Manual: Theory and Practice, and countries which have adopted the Geometric Mean for elementary aggregation on the basis that this is allowing for consumer price substitution should revisit their decisions.