RPI vs CPI
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Discussion

steve singh

Original Poster:

3,995 posts

189 months

Tuesday 28th June 2011
quotequote all
Could someone please elaborate on the crux of the difference between the two?

Namely I'm trying to establish why the CPI is lower than RPI.

Thanks

scotal

8,751 posts

295 months

Tuesday 28th June 2011
quotequote all
http://www.statistics.gov.uk/downloads/theme_econo...

Enjoy!

(The CPi and RPI have slightly different makeups.)

ralphrj

3,842 posts

207 months

Tuesday 28th June 2011
quotequote all
This should probably contain everything you need to know.

http://www.statistics.gov.uk/downloads/theme_econo...

steve singh

Original Poster:

3,995 posts

189 months

Tuesday 28th June 2011
quotequote all
Thanks guys - I had a read of that earlier (did a google search before posting) but it doesn't explain which are the material items which are driving the 1% (?) or so current differential between RPI and CPI.

ringram

14,701 posts

264 months

Tuesday 28th June 2011
quotequote all
There are several differences between the RPI and the CPI, not just housing costs as is regularly quoted on the news when comparing them.

Eg RPI includes buildings insurance, council tax, and road fund licence, all of which have risen significantly over the last few years.

RPI does includes mortgage interest payments. You point out that base rates are low, but that does not necessarily mean that mortgage interest payments are lower. Many people have fixed rate mortgages, so their payments have not changed. And new mortgages are significantly more expensive now, compared to base rates, than they were (say) 5 years ago. This means that the mortgage interest payments have not fallen as much as you might expect. Also rents... which have increased quite a bit.

jeff m

4,066 posts

274 months

Tuesday 28th June 2011
quotequote all
steve singh said:
Thanks guys - I had a read of that earlier (did a google search before posting) but it doesn't explain which are the material items which are driving the 1% (?) or so current differential between RPI and CPI.
I didn't read the links, but basically the Govenment took out bits from the RPI that were "inconvenient" and would cause them to pay out higher benifits and pensions if the RPI was used.
Hence CPI used for their "outgoings".
There is/was some merit to their reasoning in that peoople on pensions do not generally have mortgages. Not to mention many pension plans are underfunded so CPI was a needed break for them too.

RPI real
CPI convenientsmile

JohnP68

426 posts

298 months

Tuesday 28th June 2011
quotequote all
One of the main differences is the technical method of calculation. One uses the arithmetic mean, the other uses geometric mean. This explains about 0.8% pa of the average difference between CPI and RPI in the past. This sort of difference is projected to continue in the future even if, as expected, the baskets of goods are made more similar

steve singh

Original Poster:

3,995 posts

189 months

Wednesday 29th June 2011
quotequote all
Thanks guys - that helps smile

NorthernBoy

12,642 posts

273 months

Friday 1st July 2011
quotequote all
JohnP68 said:
One of the main differences is the technical method of calculation. One uses the arithmetic mean, the other uses geometric mean. This explains about 0.8% pa of the average difference between CPI and RPI in the past. This sort of difference is projected to continue in the future even if, as expected, the baskets of goods are made more similar
Yes, this is the biggest driver of the difference. Geometric mean is only ever the same as arithmetic, or less, it can't be more.

The reason for picking geometric is that this tracks better people's behaviour as prices change. If carrots double in price then people will probably buy less, and so they should not increase in proportion in basket with the price, but with some lower number.