Consumer Price Index (CPI) – Definition

Definition of the Consumer Price Index (CPI): A UK price index produced by the Office of National Statistics. Using a consistent basket of goods which excludes the cost of housing, the CPI allows investors, government and financial institutions to measure inflation of goods & services in the UK economy.

What is the Consumer Price Index (CPI)?

CPI is a pricing index. On a regular basis, the ONS statisticians compile the prices of a static list of common household goods. You’ll see this quoted in the best UK economics books interchangeably with the rate of inflation as it’s a British measure.

As the CPI is an index, the total cost is expressed as a relative value to a historic point (e.g. 2015 = 100). This allows for easy comparison between periods.

The basket of goods is occasionally updated to ensure that it remains consistent with consumer trends. For example, smart speakers were added in 2019, while envelopes were removed.

Definition of consumer price index
The definition of CPI is an economics concept

How is the phrase Consumer Price Index (CPI) used in a sentence?

“The consumer price index has increased by 1.8% year-to-date, in a sign that the economy is beginning to recover.”

What else you should know about the CPI

The CPI is often confused with the Retail Prices Index (RPI), which includes the cost of housing and is often higher than the CPI.

Due to mathematical issues with the way the RPI is actually calculated, it has fallen out of favour with mainstream index users. It is no longer cited by the Bank of England as a basis for making interest rate decisions.

The use of RPI is now largely limited to some government tax & welfare applications and in a business where historic contracts make specific reference to the RPI (e.g. a rental agreement which increases by RPI each year).

One unfortunate impact of RPI being withdrawn from common use is that index-linked government bonds are linked to RPI. If RPI is officially withdrawn and replaced with CPI, this will reduce the expected future increases in the coupon rate of these bonds, and their value could plunge. This issue is currently open to consultation at the date of writing.

Consider finding a financial adviser if you own index-linked bonds and are unsure of your options.

How does the definition of Consumer Price Index (CPI) relate to investing?

CPI is the main measure of inflation, which is hugely important to investors.

One of the primary objectives of buying shares or investing in property is to create wealth to beat inflation and deliver a real return.

Inflation should be factored into all discussions of real investment returns of the main asset classes, such as real house prices.

The best investing books and investing courses will always make clear whether they are describing nominal rates of return (which are not adjusted for inflation) or real rates of return (which are adjusted).

UK rates of return will usually be adjusted by CPI to calculate the real rate.

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