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COST OF LIVING AND INFLATION RATES
The first cost of living index to be calculated took July purchased by households in the UK. The indices are
1914 as 100 and was based on the pattern of expenditure compiled using a selection of around 650 goods and
of working-class families in 1914. The cost of living services, and the prices charged for these items are
index was superseded in 1947 by the general index of collected at regular intervals at about 150 locations
retail prices (RPI), although the older term is still throughout the country. The Office for National Statistics
popularly applied. (ONS) reviews the components of the indices once every
The Harmonised Index of Consumer Prices (HICP) year to reflect changes in consumer preferences and the
was introduced in 1997 to enable comparisons within the establishment of new products. The table below shows
European Union using an agreed methodology. In 2003 changes made by the ONS to the CPI ‘shopping basket’
the National Statistician renamed the HICP as the in 2007.
Consumer Prices Index (CPI) to reflect its role as the main CPI excludes a number of items that are included in
target measure of inflation for macroeconomic purposes. RPI, mainly related to housing such as council tax and a
The RPI and indices based on it will continue to be range of owner-occupier housing costs, such as mortgage
published alongside the CPI. Pensions, benefits and payments. The CPI covers all private households,
index-linked gilts continue to be calculated with reference whereas RPI excludes the top 4 per cent by income and
to RPI or its derivatives. pensioner households who derive at least three-quarters
of their income from state benefits. The two indices use
CPI AND RPI different methodologies to combine the prices of goods
and services, which means that since 1996 the CPI
The RPI and CPI measure the changes month by month inflation measure is on average less than the RPI inflation
in the average level of prices of goods and services measure.
‘SHOPPING BASKET’ OF GOODS AND SERVICES
Changes to the CPI* 2007 basket of goods and services include:
Goods and Services Group Removed items New items
Food and non-alcoholic beverages vegetable oil; brie; Brussels sprouts; olive oil; pro-biotic drink; courgettes;
pre-packed fresh vegetables broccoli
Clothing and footwear child’s wellington boots; men’s leather –
boots
Housing and household services – shower head
Furniture and household goods – portable or free-standing electric fan
Health UV protection sunglasses (non- –
designer frames); designer spectacle
frames
Transport – satellite navigation system
Communication – mobile downloads (eg ringtones)
Recreation and culture portable colour television (CRT); flat panel television (14–25″); digital
VHS video recorder; portable CD (DAB) radio; pre-recorded DVD
radio cassette; car CD/radio auto- (non-film) from chart; recordable DVD
changer; widescreen (CRT) television; (price per DVD from pack of 5–25);
blank VHS cassette; pre-recorded digital photography processing (print
video; 35mm compact camera; mail of up to 50 photographs)
order develop and print photography
services; digital television installation
fee; decorative outdoor plant pot
Restaurants and hotels (catering) – onboard catering (rail, sea and air);
vending machine canned/bottled
fizzy drink
Miscellaneous goods and services gemstone cluster ring diamond solitaire ring; credit
card charges; mortgage fees;
toothbrush
* RPI goods and services are grouped together under different classifications
Cost of Living and Inflation Rates 569
INFLATION RATE each month in an Indices bulletin and electronically on
the National Statistics website (W www.statistics.gov.uk).
The twelve-monthly percentage change in the ‘all items’ They are also available as a recorded telephone message
index of the RPI or CPI is referred to as the rate of (T 020-7533 5866).
inflation. As the most familiar measure of inflation, RPI is
often referred to as the ‘headline rate of inflation’. CPI is PURCHASING POWER OF THE
the main measure of inflation for macroeconomic POUND
purposes and forms the basis for the government’s
inflation target, which is currently 2 per cent. The Changes in the internal purchasing power of the pound
percentage change in prices between any two months/ may be defined as the ‘inverse’ of changes in the level of
years can be obtained using the following formula: prices: when prices go up, the amount which can be
purchased with a given sum of money goes down. To find
Later date RPI/CPI − Earlier date RPI/CPI the purchasing power of the pound in one month or year,
× 100
Earlier date RPI/CPI given that it was 100p in a previous month or year, the
calculation would be:
eg to find the CPI rate of inflation for 2006, using the
Earlier month/year RPI
annual averages for 2005 and 2006: 100p ×
Later month/year RPI
102.3 − 100.0
× 100 = 2.3 Thus, if the purchasing power of the pound is taken to be
100.0 100p in 1975, the comparable purchasing power in 2000
From 14 February 2006 the reference year for CPI was would be:
re-based to 2005=100 to improve price comparison 34.2
clarity across the EU. None of the underlying data, from 100p × = 20.1p
170.3
which the re-referenced series was calculated, was revised.
Historical rates of change (such as annual inflation For longer term comparisons, it has been the practice to
figures), calculated from the re-based rounded index use an index which has been constructed by linking
levels, were revised due to the effect of rounding. The CPI together the RPI for the period 1962 to date; an index
rate of inflation figure given in the table below may differ derived from the consumers expenditure deflator for the
by plus or minus 0.1 percentage points from the figure period from 1938 to 1962; and the pre-war ‘cost of living’
calculated by the above equation. The change of reference index for the period 1914 to 1938. This long-term index
period and revision due to rounding does not apply to the enables the internal purchasing power of the pound to be
RPI which remains unchanged. calculated for any year from 1914 onwards. It should be
The RPI and CPI figures are published by the Office for noted that these figures can only be approximate.
National Statistics on either the second or third Tuesday of
Annual average RPI Purchasing power of £ Annual average CPI Rate of inflation
(1987 = 100) (1998 = 1.00) (2005 = 100)* (RPI/CPI)
1914 2.8 58.18
1915 3.5 46.54
1920 7.0 23.27
1925 5.0 32.58
1930 4.5 36.20
1935 4.0 40.72
1938 4.4 37.02
There are no official figures for 1939–45
1946 7.4 22.01
1950 9.0 18.10
1955 11.2 14.54
1960 12.6 12.93
1965 14.8 11.00
1970 18.5 8.80
1975 34.2 4.76
1980 66.8 2.44 18.0
1985 94.6 1.72 6.1
1990 126.1 1.29 71.5 9.5/7.0
1995 149.1 1.09 86.0 3.5/2.6
1998 162.9 1.0 91.1 3.4/1.6
2000 170.3 0.96 93.1 3.0/0.8
2005 192.0 0.85 100 2.8/2.1
2006 198.1 0.82 102.3 3.2/2.3
* In accordance with an EU Commission regulation all published CPI figures were re-based to 2005 = 100 with effect from 14
February 2006, replacing the 1996 = 100 series
