Retail Price Index (RPI)

The Retail Price Index (RPI) is a longstanding measure of consumer price inflation in the United Kingdom. First calculated in 1947 and regularly published since 1956, RPI was the U.K.’s principal inflation measure until it was superseded by the Consumer Prices Index (CPI) as the official target measure in 2003. Although reclassified by the Office for National Statistics (ONS) as “not a national statistic” in 2013, RPI is still published and continues to affect some contractual and financial arrangements.

What RPI measures and how it’s calculated

• RPI tracks price changes for a fixed “basket” of goods and services. The basket is large — historically built from hundreds of items and many price quotes — to reflect typical household spending patterns.
• The index expresses the change in prices over time, producing a headline inflation rate (e.g., year‑on‑year percentage change) that is widely cited.

How RPI differs from CPI

• Coverage: RPI and CPI include different sets of goods and services and target different population groups.
• Calculation method: The two indices use different aggregation formulas and methods for averaging price relatives. These methodological differences produce the so‑called “formula effect.”
• Typical outcome: Over recent decades RPI has often reported higher 12‑month inflation rates than CPI because of the coverage and formula differences.
• Context: CPI originated as the Harmonised Index of Consumer Prices (HICP) in the 1990s to provide comparable measures across EU economies and became the U.K.’s official policy target index in 2003.

Uses and impact on financial decisions

Even though it is no longer the official statistic, RPI remains used in a number of practical contexts:
– Cost‑of‑living and wage escalation clauses in employment and pension contracts.
– Adjustment of certain tax allowances and benefits.
– Indexation of social housing rents and other regulated charges.
– Indexing of some financial instruments and contracts (index‑linked securities and agreements that reference RPI).

Because RPI can run higher than CPI, contracts tied to RPI may produce larger adjustments than those tied to CPI, affecting household incomes, rents, pensions, and government liabilities.

Why RPI is considered a “legacy” measure

Critics and statistical authorities point to outdated calculation methods and a lack of modernisation in RPI’s methodology. For these reasons, the ONS now treats RPI as a legacy measure and continues to publish it mainly because existing legal and contractual arrangements reference it.

Example

Differences between the indices can be substantial in high‑inflation periods. For example, in May 2023 the CPI annual rate was reported at 8.7% while the RPI annual rate was 11.4%, illustrating how choice of index affects reported inflation.

Key takeaways

• RPI is a long‑standing U.K. inflation measure introduced in the mid‑20th century but replaced by CPI as the official policy target in 2003.
• It uses a fixed basket and different formulas from CPI, which often results in higher reported inflation (the “formula effect”).
• RPI still matters because it’s embedded in wages, rents, tax adjustments, and some financial contracts.
• The ONS regards RPI as a legacy measure and publishes it for legal and practical reasons despite methodological criticisms.

Further reading / sources

• Office for National Statistics — Inflation and price indices
• United Kingdom Parliament — Measuring inflation; Criticism of the Retail Prices Index
• Financial and market summaries on RPI and CPI comparisons