UK Inflation: How It Is Measured and What It Means for You

How inflation is measured

Every month, the Office for National Statistics collects around 180,000 prices from thousands of shops and online retailers for a basket of goods and services that represents typical household spending. The change in the cost of this basket over the previous year is the Consumer Prices Index (CPI).

CPI versus RPI

The Retail Prices Index is an older measure that differs from CPI in both its coverage and methodology. RPI includes housing costs including mortgage interest payments; CPI does not. The methodology also differs: RPI uses an arithmetic mean; CPI uses a geometric mean. RPI is almost always higher than CPI as a result. Despite being considered a less accurate measure, RPI is used to set rail fare increases and some government savings products.

What drives inflation

Inflation is driven by demand (spending outpacing productive capacity), supply shocks (energy price spikes, supply chain disruptions) and expectations. The Bank of England's inflation target is 2% CPI; persistent deviation above this typically leads to interest rate increases.