EFA (47): Retail Prices Index

Inflation is a potential problem for any economy. One of the key goals of economic policy is to keep inflation low and stable.

In the 47th item in our regular Economics for Amateurs (EFA) series, we look at how inflation is measured in Britain. The remaining three items in this series will appear over the coming weeks.

Although there are various possible measures of inflation, the most famous one in Britain is the Retail Prices Index (RPI), a monthly measure of the prices paid by consumers.

The index is published by the Office for National Statistics (ONS). Although it is no longer the official index of inflation — that is a slightly different measure called the Consumer Price Index — it is often quoted in the media and is used for wage negotiations and calculating pension increases.

An important point to remember about inflation is that it is a sustained increase in the general price level, not a temporary increase or an increase in the price of any particular good or service.

The RPI is calculated by regularly collecting the prices of around 650 goods and services, measured each month in different parts of the United Kingdom.

These goods are chosen to reflect the typical spending pattern of British households, as measured by other survey data such as the Family Expenditure Survey. The spending patterns of particularly rich or poor families are excluded from the calculation.

When calculating a price index, the increases in the prices of individual goods and services are weighted according to the share of their income that consumers spend on these goods or services.

For example, an increase in the price of a good that consumers spend 10 per cent of their income on will have twice as large an impact on the overall index as a good that consumers spend 5 per cent of their income on.

The weights used in the RPI (and other price indices) are regularly revised to reflect changes in spending patterns. For more information about the RPI and its caculation, see here.