What it means
Britain has two famous inflation numbers, and the older one refuses to retire. The Retail Price Index has measured UK prices since 1947, and despite official censure, it still moves billions.
The RPI differs from the Consumer Prices Index in coverage and arithmetic: it includes mortgage interest and housing costs, and its formula averages prices in ways that bias it upward. The Office for National Statistics' methodology paper on the two measures' differences documents the formula effect: the RPI's averaging method overstates inflation relative to the CPI's, a gap that persists across decades.
That formula flaw led to formal demotion: the RPI lost national statistic status in 2013, and the UK Statistics Authority has pressed for its alignment with the CPIH measure by 2030. Yet the index is embedded where it cannot easily leave: index-linked gilts pay on RPI, rail fares and some utilities rise by it, and private contracts of every vintage index to it.
The result is a policy oddity: the government prefers CPI when it pays, as with benefits and tax thresholds, and RPI when it collects, as with rail fares, an asymmetry critics call index shopping. The 2030 reform will largely merge RPI's methods into CPIH's, unwinding a century of statistical history and transferring billions between gilt holders and the Treasury by changing an averaging formula.
For a non-finance reader, the RPI is a lesson in how a statistic becomes a contract: once a number is written into bonds, fares, and pensions, its flaws become property rights. Students meet the pair through the wedge question: why does one official measure of the same inflation run persistently above the other, and the answer, an averaging formula from 1947, teaches more statistics than most textbooks.
The index's defenders make a dignity argument: RPI tracks the costs households actually face, housing included, and the technically superior measures exclude the biggest bill most families pay.
In practice
Real-world examples.
Example
An index-linked gilt's coupon rises with RPI because the 1990s contract says so, whatever statisticians now think of the formula.
Example
Rail fares climb by RPI while benefits rise by CPI, the asymmetry critics call index shopping. The asymmetry had a name.
Example
A 2030 methodology reform aligns RPI with CPIH, transferring billions between gilt holders and the Treasury.
Formula
Calculation
No new formula; the RPI's Carli averaging, an arithmetic mean of price relatives, creates the upward formula effect versus the CPI's Jevons geometric mean, and the ONS quantifies the resulting annual wedge between the two indices.
A stylised illustration shows the mechanism. Suppose a basket has two items that each cost $10 at the start. After a year, item A costs $20 and item B costs $5, giving price relatives of 2.0 and 0.5. The arithmetic mean of those relatives is (2.0 + 0.5) / 2 = 1.25, which implies inflation of 25%. The geometric mean is the square root of (2.0 x 0.5) = the square root of 1.0 = 1.00, which implies 0% inflation.
Real baskets contain many items and far smaller price changes, so the real gap is much narrower than this deliberately extreme example. The principle is the same: the arithmetic method gives more weight to large price rises, and that is why it sits above the geometric method over time.Case study
Seen in the real world.
This case study is fictional and illustrative. A made-up British pensioner holds index-linked gilts bought in the 1990s, whose coupons and principal rise with RPI. Her nephew, an economics student, notices the gilts pay inflation plus a margin, while the state pension next door uprates by CPI, and asks why the family trust document insists on RPI-linked assets.
The answer is a small history lesson: when the gilts were issued, RPI was the inflation measure, and the bond contract promises RPI for fifty years, so the statisticians' later verdict on the formula cannot touch her payments until the 2030 reform arrives. The student maps the winners and losers of that reform: gilt holders lose the formula wedge baked into their contracts, the Treasury gains billions in lower debt costs, and rail passengers finally stop paying fares indexed to the discredited measure. At a family meeting they adjust nothing, because the trust's gilts mature before the change bites, but the student's summary goes into the family file: an index is never just a measurement once someone has sold it, and the RPI's long retirement is the price of the nation's oldest statistic having been written into too many promises.
Watch out
Common mistakes.
- Treating RPI and CPI as interchangeable; coverage and formula differences produce a persistent wedge, and contracts name one index specifically.
- Assuming the demotion ended its use; RPI lost national statistic status in 2013 yet still governs gilts, fares, and legacy contracts until reform.
- Ignoring the reform's transfer; the 2030 alignment moves real money between index-linked bondholders and the government, not just decimal points.
Questions
People also ask.
What is the Retail Price Index?
A UK inflation measure running since 1947, including housing costs and using an averaging formula that biases it upward relative to the CPI.
Why is RPI still used if discredited?
Contracts embed it: index-linked gilts, rail fares, and legacy agreements specify RPI, and changing the measure takes legislation and time.
What changes in 2030?
RPI's methods align with CPIH, shrinking the formula wedge and transferring value between index-linked gilt holders and the Treasury.
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