When agreeing terms for an inflation linked rent review or a cap on costs, it is worth taking a moment to consider which index the rate is to be linked to and what the index measures.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is now the lead measure of inflation. CPIH tracks the rate at which goods and services bought by households rise or fall.
RPI is now a legacy measure. The Office for National Statistics maintains RPI to meet existing needs as it is widely used in existing contracts, however RPI no longer meets the standard required for designation as a National Statistic.
The most common approach to measuring inflation is the 12-month inflation rate which compares prices for the latest month with the same month a year ago. The rate is determined by the balance between upward and downward price movements in the range of goods and services included in the index. The 12-month CPIH inflation rate was 2.7% in January 2018, compared with 1.9% in January 2017, showing an increase in inflation over the last year.
A selection of representative items are included in the basket of goods and services which is used to measure the UK’s inflation rate. The basket tracks the price movements of 700 goods and services in 20,000 locations across the UK. The basket is updated annually to ensure it reflects contemporary habits, technology and the cost of living.
Housing, water, electricity, gas and other fuels; transport; and recreation and culture are the three largest contributing areas of expenditure in the basket.
The Office for National Statistics has recently completed its annual review of the basket. In 2018 15 items were added to the basket, 14 were removed and 7 items were modified.
New items in the basket this year included exercise leggings, action cameras, a soft play session, body moisturising lotion and a cooked pastry based savoury snack. Showing how times have changed, a bottle of lager in a nightclub, a pork pie, a pasty or savoury pie, a digital camcorder and cash machine charges were out of the basket.
An example of a direct replacement in this year’s basket is a cooked pastry-based savoury snack. It was introduced in place of a pasty or pie with the aim of widening collection of the items in the basket from a range of takeaway outlets.
The full list of what is ‘in’ and ‘out’ of the basket and the reasons for the decision are available on the Office for National Statistics Website.