Changes in Inflation Measurement

Today’s Inflation Report

flame-fire-oven-light-77502The Office for National Statistics (ONS) inflation report announced that UK inflation rose to 2.3% in February from 1.8% in January, as measured by the Consumer Price Index (CPI).

Rising food and fuel prices, coupled with the sharp drop in the value of the pound, have pushed inflation to its highest level since September 2013.

But from March 2017 onwards, the ONS is changing its headline rate of inflation for the first time since 2003 when it moved from the Retail Price Index.

Changing to CPIH

The new headline rate is CPIH. This additional measure of consumer prices, unlike CPI, also takes into account owner-occupiers’ housing costs and council tax. The ONS uses the amount that you would have to pay to rent a property as a proxy for owner-occupier housing costs. While last month’s figures showed that CPIH was slightly higher than CPI (2.0% vs 1.8%), on average over the last ten years, CPIH has been slightly below CPI.

However, the new measurement no longer has a ‘kitemark’ status from the UK Statistics Authority (UKSA), which demonstrates that a measurement meets the UKSA’s code of practice. CPIH lost the kitemark designation in August 2014 amid concerns on the types of calculations used for owner-occupiers’ housing costs. While the ONS had hoped CPID would be re-designated as a National Statistic in time for the change next month, the UKSA announced it would not consider that until the end of April.

Along with the UKSA, the Treasury is also refusing to adopt CPIH as its preferred measure. It will not do so until it has regained its designation.

Key measures of inflation

CPI

  • ONS measure of inflation since 2003
  • Targeted by the Bank of England’s to set rates
  • Calculated based on the prices for a basket of goods
  • Goods are categorised, then weighted based on how often they are bought

CPIH

  • Adds owner-occupier housing costs and council tax to CPI
  • Otherwise calculated in the same way CPI
  • Figures have been published since 2013, but the ONS has calculated figures back to 2006

RPI

  • ONS measure of inflation until 2003
  • It uses a different formula and basket of goods compared to CPI
  • Includes mortgage interest payments and council tax
  • It is no longer a National Statistic, as the calculations used are not considered to be best practice

If you would like to discuss the impact of inflation rates on your finances in further detail, please get in touch with a member of our Wealth Management team on 01903 534587.

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