Measurement issues

Measurement issues - read moreThe politics of inflationCPI vs RPIInflation coverage issuesInflation calculation issuesInflation substitution issues

The politics of inflation measurement

Inflation indices are key measures of the political performance. Governments have an incentive to portray their country’s inflation in the best possible light. Statistical offices vary in their ability to resist political pressure.

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RPI is the original UK index. CPI is an EU invention which was not intended to measure cost of living and was created for a completely different purpose. CPI’s method of calculation ensures it is usually around 1 per cent lower than RPI.

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Coverage issues

Price indices cover everything that the population spends its money on. That expenditure should include the whole population and give each member of it an equal weight. Neither CPI nor RPI does this.

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Calculation issues

An ideal price index is worked out using a simple method that is easy for all to understand and accurately portrays the price rises actually experienced by the total population. However all methods currently used have their problems.

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Substitution issues

An ideal price index must make some provision for changing purchasing habits as people switch to new products. It also has to deal with items that are superseded by improved or different versions. Methods used for these are not ideal.

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CPI's underestimate of inflation

CPI in the UK probably underestimates true inflation by 1 to 1.5 per cent. The exact amount is variable and there is no simple consistent adjustment that can be made.

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