Unite Research Department Briefing
Inflation measures and pay bargaining
Introduction
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Debate over the merits of the Retail Prices Index (RPI) and Consumer Prices Index
(CPI) measures of inflation has been reignited recently following publication of a
2015 report commissioned by the UK Statistics Authority recommending that RPI
should eventually be discontinued and a version of CPI (albeit one that includes a
measure of housing costs – CPIH) should become the main measure of inflation in
the UK.
Although discussions about the measurement of inflation can be rather technical, it
is a matter of significant importance because of the impact on pay bargaining and
the value of wage increases.
This briefing summarises the current situation and outlines the case for continuing to
use RPI as the appropriate measure for uprating wages.
Summary of the issues
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Pay bargaining has traditionally been based around RPI. However, employers may
seek to focus on the CPI measure as this has been lower than RPI and would reduce
pay rises.
The RPI has been subject to a number of moves to weaken its position at the
expense of greater prominence for the CPI. This has included the Office for National
Statistics downgrading its status from ‘national statistic’ to ‘official statistic’ in March
2013.
RPI and CPI use different statistical methods to calculate average price changes.
Here’s the technical bit: The RPI uses an ‘arithmetic mean’ (adding up a collection of
numbers and dividing by the number of numbers in the collection). The CPI uses a
‘geometric mean’ (defined as the nth root of the product of n numbers).
The UK Statistics Authority plans to launch a formal public consultation on price
statistics soon after the General Election and to make a final response later in 2015.
The case for using RPI
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The case for using RPI for uprating wages has been most recently supported in a
report produced by Dr Mark Courtney, a former Treasury Economic Adviser, which
finds that “Overall…the RPI is as good a consumer price index as one can get for
uprating purposes.”
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Among its main findings are:
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Systemic differences between RPI and CPI (i.e. the lower CPI figures
compared to RPI) are entirely the result of under-estimation by the CPI;
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Coverage of the RPI is targeted on the working population, as it excludes the
super-rich (wealthiest 4% of households), tourists and pensioners;
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Unlike CPI, the RPI includes owner occupier housing costs, a major element
of most household expenditure;
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These differences in coverage have caused the CPI to be lower than the RPI
by an average of 0.3 percentage points since the CPI measure was
introduced;
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Nearly two-thirds of the difference between RPI and CPI is accounted for by
the different statistical methods used in their calculation (see above);
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The withdrawal of ‘national statistic’ status from the RPI (see above) lacked
a convincing statistical basis and cannot be regarded as a comment on its
current accuracy. It was also done without following the usual practice of
written consultation or discussion with outside experts.
February 2015
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