How did it happen? The upstart measure of inflation CPI has so overtaken RPI that is now ignored – particularly now that the Retail Prices Index is now running at 2% twice as much as the Consumer Prices Index. In other words we believe inflation is half as high as it really is.
Since 2010 the Government has used the lower CPI for benefits, tax credits and public sector pensions. But student loans, rail travel and mobile phone contracts are increased in line with the RPI.
Savings rates are worse than they seem
As savings rates are shy of both measures we seem to comfort ourselves by forgetting RPI. Newspaper and online stories about rising inflation do not mention RPI, which was last re-based to 100 in 1987 so that we can see prices have almost tripled in under 30 years at 287.
It was introduced to protect ordinary workers from the price increases of the First World War. It includes boring details like mortgage payments, council tax, buildings insurance, car tax, estate agents and tv licence costs, which the CPI does not.
Stockbroker and unit trust fees are included
CPI seems more upmarket as it includes stockbroker fees, unit trust fees, new car prices and student accommodation costs. It was devised in 1996 and I suppose we should be grateful that no savings institution has introduced an account linked to CPI. But new accounts offering RPI have now largely disappeared, although re-investors with National Savings can stop the value of their savings falling as fast as they will in other accounts.
Rising prices are good for us
Officials tell us that a little bit of inflation is good for the economy. It may make people shop rather than wait for prices to increase more after the fall in the value of sterling against the Euro and the US dollar. Those new car prices might skew the CPI in time as we import new models before they rise even more in price. The provision of upmarket student accommodation is also costing students more than the old fashioned university-provided halls.
Maybe it is time the Government statisticians started working on a new measure of inflation.