Limitations of the current methodology

In the summary of their analysis, the Authority presented their views on the drawbacks of RPI as a suitable measure of inflation, mainly that

• RPI overstates inflation because the statistical properties of the formula used for RPI bias the rate upwards, producing an average annual overestimation of 0.7% compared to the inflation estimate of the formula used by the Consumer Price Index (CPI) and CPI including owner occupiers’ housing costs (CPIH). The formula used for RPI is no longer considered best practice by international standards, as a result, and many countries no longer use it;
• the RPI approach to measuring homeowners’ housing costs is mainly comprised of housing depreciation, which represents approximately 8% of the RPI ‘basket of goods’ and can swing RPI steeply in a housing downturn, and mortgage payments, which do not reflect consumption but the cost of financing consumption;
• and further, the RPI weighting favours the spending of private households, its coverage conditions exclude 12% of demographic households, and it uses a UK-specific classification system that doesn’t lend itself to international comparison.    

For more details on the proposed changes and the significance of the consultation, download our full summary.

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