Five Questions About: Inflation measures

I'm totally confused. What's the real measure of inflation?

Everyone's confused. Most people remember the Retail Prices Index (RPI) which was used as the official measure of inflation from 1947. You may know that it was replaced as the official measure by the Consumer Prices Index (CPI) which has been published since 1996.

What's the difference?

Both use a basket of costs to work out the effect of inflation but the CPI excludes house prices. CPI is also worked out using a different formula which effectively means it will always rise more slowly than the RPI.

Does that matter?

Inflation measures are important as they are used to work out how much pensions and benefits rise, as well as other things, such as the annual increase in the ISA allowance.

So they affect us all?

Yes. And because the Government uses the lower CPI index, increases are less than they would have been in the RPI was still used.

Why are they in the news this week?

Because the National Statistician has been considering whether to change the measures, which could have been disastrous for pensioners. She didn't, but has introduced a new version of RPI, known as the RPIJ, which uses the same calculation methods as CPI leaving us even more confused.