The Justification for the Retail Prices Index

Abstract

The UK’s Retail Prices Index (RPI) was established in 1956 and updated regularly since then, and up until 2004 it was the country’s only general consumer prices index. In that year the UK version of the European Union’s Harmonised Index of Consumer Prices was renamed the Consumer Prices Index (CPI) and made the inflation target for the Bank of England, and from 2011 onwards it has also been used by the government for some uprating purposes. The RPI has continued to be used as the reference index for many private and public contracts and for almost all public and private index-linked bonds.The UK Statistics Authority confirmed in January 2012 that both the RPI and CPI were “national statistics” that were “produced according to sound methods” but in March 2013 it changed its mind and concluded that “the methods used to produce the RPI are not consistent with internationally recognised best practices,” and that the RPI should not be formally regarded as a “national statistic.”The criticism of the RPI by the UK Statistics Authority has had no practical effect, since, in line with the overwhelming opinion expressed by users and statistical experts, the Office for National Statistics (ONS) has decided to continue publishing the RPI using the existing methodology. However, the methodological criticism expressed by the ONS and the UK Statistics Authority has influenced the intellectual tone within government and the direction of the research effort of the Office of National Statistics. Accordingly, this paper summarises the justification for the RPI that has emerged over the last three years, not only as a legitimate fixed-basket consumer price index, but also as being the most accurate consumer price currently available in the UK.