A price index is the means of measuring inflation – the speed at which, in general, prices are going up or down in the economy. This article briefly explains what inflation is and why we measure it, describes some of the range of price indices produced by ONS and explains why we need to produce so many.
What is inflation and why do we measure it?
Being able to measure inflation is important as it tells us how much of something we can get for our money. An easy way of thinking about it is in terms of changes in the price of a fixed shopping basket. For example, supposed you went to the shops today and spent £100 on a basket of items. Then, the next time you went back to the shops you bought the exact same basket of items and this time it cost you £110. The percentage increase in cost is the price inflation.
Inflation indices are used in lots of ways, such as in contracts, when up-rating pensions, calculating student loans and deciding interest rates. In other words, inflation indices are a part of our everyday life.
What are the different measures produced by ONS?
So why does this require so many measures? There are a couple of answers to this. First, we need to consider what inflation we want to measure.
For example, the Producer Prices Indices (PPIs) measure the prices of goods bought and sold by UK manufacturers. The headline measure, known as factory gate inflation, measures the price of the goods UK manufacturers charge other UK businesses for their products. This is great if you own a factory or want to understand how this part of the economy is performing, but not so useful if you want to understand the pressures on your own personal budget.
Service Producer Price Indice (SPPIS) do a similar job for the service industry sector, and have similar types of use to PPIs, but from a service sector perspective.
For private households, there are the Consumer Prices Index (CPI) and Retail Prices Index (RPI). From March 2013, ONS will also publish a new measure, CPIH, which includes owner occupiers’ housing costs which are excluded from the CPI.
If you want to know about changes in the average price of a house there’s the House Price Index (HPI).
The multiple measures for private households bring us on to the second reason for producing a range of measures – what do you want to do with your measure of inflation? The CPI has been designed to provide a comparable measure of inflation across Europe. Having been designed to be comparable, it has also been designed in line with best international standards for measuring the inflation of private households.
The RPI has been around a lot longer than the CPI (it dates back to the 1940s). The RPI has many long-term users and ONS is required to produce it under UK law. The National Statistician recently announced that the RPI does not meet best international standards because of a formula used in its calculation. Therefore a new index called RPIJ, which uses another formula (called Jevons) in its calculation, will be published from March 2013. In recognition of the value to users in maintaining continuity, the RPI will continue to be published too.
ONS produces a range of price indices, all of which measure the inflation for different groups of people or products.
ONS statisticians are always happy to help people understand the differences between the indices so that users can decide which is the most appropriate measure for them to use.
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