Impact of VAT reduction on the consumer price indices

Abstract

This article explains how ONS successfully measured prices for the consumer price indices following the temporary reduction in the rate of VAT from 17.5 per cent to 15 per cent from 1 December 2008. It became more difficult to measure prices because in December 2008 many shops lowered their till price to reflect the new VAT rate but they did not change the shelf price - prices are collected for consumer price indices by visiting shops and looking at the shelf price. This article explains how information was collected from each shop on whether it had passed on the VAT reduction and, if so, whether the price was changed on the shelf or only at the till. It explains how ONS used this information to adjust the price information collected from the shelf and how checks were introduced to maintain quality. It provides information on the impact of the VAT change on the Consumer Prices Index and estimates that in December 2008 the effect on the CPI from retailers and service providers passing on both the VAT reduction and increases to excise duty was to reduce the 12-month rate by around 0.5 percentage points.