The Consumer Prices Index (CPI) and the Retail Prices Index (RPI) are published each month by the UK Office for National Statistics. These are the main measures used in the UK to record changes in the level of the prices most people pay for the goods and services they buy. The RPI is intended to reflect the average spending pattern of the great majority of private households. Only two classes of private households are excluded, on the grounds that their spending patterns differ greatly from those of the others: pensioner households and high-income households. The CPI, however, has a wider remit—it is intended to reflect the spending of all UK residents, and also covers some costs incurred by foreign visitors to the UK.
These indices are published on the office for National Statistics website at www.statistics.gov.uk [accessed 11 October 2006] as well as in various hard-copy monthly publications such as Labour Market Trends and the Monthly Digest of Statistics, available in many public libraries. When you have completed this Unit, you may be able to use the latest value of the RPI and/or the CPI to work out for yourself how much prices have changed since this Unit was revised in 2005. You will not be able to do this if there have been any major changes to the way the indices are calculated since 2005.
The CPI and RPI are calculated in a similar way to the price index for the shopping basket of five items described in Subsection 4.2. However, they are calculated once a month and are based on a very large ‘basket? of goods. The contents of the basket and the weights assigned to the items in the basket are updated annually to reflect changes in spending patterns. However, once decided on at the beginning of the year, they remain fixed throughout the year.
Each month, for the RPI, the price ratio for the basket is calculated relative to the previous January. Then the value of the index is obtained by multiplying the value of the index for the previous January by this price ratio. For example,
The CPI works in much the same way, except that price ratios are calculated relative to the previous December. So, for example,
The CPI base date was 1996. (This refers to the average level of prices throughout 1996, not to a specific date in 1996.)
Since these price indices are calculated from price ratios, they measure price changes in terms of the ratio of the overall level of prices in a given month to the overall level of prices at an earlier date. They give a relative, not an absolute comparison of prices. In practice, data on most prices are collected on a particular day near the middle of the month; the values of the RPI and CPI calculated using these data are referred to simply as the values of the RPI and CPI for the month. For example, the RPI took the value 183.1 in January 2004. This value measures the ratio of the overall level of prices in that month to the overall level of prices on a date at which the index was fixed at its starting value of 100. This date is called a base date, which (at the time of writing, 2005) was 15 January 1987. Thus the general level of prices in January 2004, as measured by the RPI, was
times the general level of prices in January 1987; or, equivalently, prices in January 2004 were 83.1% higher than in January 1987. The base date has no significance other than to act as a reference point.
The RPI and CPI are each based on a very large ‘basket? of goods. (The two baskets are similar, but not exactly the same.) Each contains some six hundred and fifty items including most of the usual things people buy—food, clothes, fuel, household goods, housing, transport, services, and so on. Each basket is an ‘average? basket for a broad range of households.
The items in the baskets are often grouped into broader categories. For the RPI, the five fundamental groups are ‘Food and catering?, ‘Alcohol and tobacco?, ‘Housing and household expenditure?, ‘Personal expenditure? and ‘Travel and leisure?. These groups are divided into fourteen more detailed subgroups (which are further divided into sections), as shown in Figure 2. The inner circle shows the five groups, and the outer ring shows the fourteen subgroups. Notice that in the inner circle the sector labelled ‘Food and catering? has been drawn almost twice as large (as measured by area) as that labelled ‘Alcohol and tobacco?. This reflects the fact that the typical household spends nearly twice as much on food and catering as on alcohol and tobacco. The weight of an item or group reflects how much money is spent on it. So the weight of the ‘Food and catering? group is almost twice that of ‘Alcohol and tobacco?.
Source: Consumer Price Indices ? A Brief Guide (2004), National Statistics, www.statistics.gov.uk[accessed 12 October 2006]
Figure 2 Structure of the RPI in 2004The outer ring represents the same total expenditure as the inner circle, but in more detail. For example, in the outer ring the area labelled ‘Food? is more than twice as large as that labelled ‘Catering? (which includes meals in resaurants and canteens, and take-away meals and snacks), reflecting the fact that the typical household spends more than twice as much on food as on catering; the weight of the subgroup ‘Food? is more than double the weight of the subgroup ‘Catering?. The chart gives a good indication of average spending patterns in the UK in the early 21st century.
The items in the CPI basket are divided into twelve broad groupings called divisions which are further subdivided. The names of the divisions are given in Activity 27.
(a) Using Figure 2, estimate what fraction of the expenditure of a typical household is on each of the following groups and subgroups:
(i) personal expenditure:
(ii) housing and household expenditure:
(iii) housing.
(b) Suppose that a household spends a total of £420 per week on goods and services that are covered by the RPI. Use your answers to part (a) to estimate very approximately how much is spent each week on each of the groups and subgroups in part (a).
(a) What you need to remember here is that the size of an area represents the proportion of expenditure on that class of goods or services. (Also, it is admittedly not very easy to estimate these areas ‘by eye?!)
(i) The sector for ‘Personal expenditure? looks as if it is approximately a tenth of the whole inner circle—so approximately a tenth of total expenditure is personal expenditure.
(ii) ‘Housing and household expenditure? looks as if it is approximately one third of the inner circle, so approximately a third of expenditure is on housing and household expenditure.
(iii) The area for ‘Housing? takes up about a fifth of the outer ring, so about a fifth of expenditure is on housing.
(b)
(i) The amount spent each week on ‘Personal expenditure? is approximately
(ii) The amount spent each week on ‘Housing and household expenditure? is approximately
(iii) The amount spent each week on ‘Housing? is approximately
Recall, however, that the weights represent average proportions of expenditure, so these estimates will only be good ones if the spending patterns of this household are similar to those of the ‘typical? household.
To ensure that the index basket reflects the proportion of average spending devoted to different types of goods and services, it is necessary to find out how people actually spend their money. The Expenditure and Food Survey (EFS) records the spending reported by a sample of some seven thousand households spread throughout the United Kingdom. Data from the EFS are used to calculate the weights of most of the items included in the RPI basket. Since 1962, the weights have been revised each year, so that the index is always based on a basket of goods and services which is as up to date as possible. Most of the weights for the CPI come from a different source: the UK National Accounts. Again these are revised each year.
The weight of a group or subgroup directly depends on the average expenditure of households on that item. In Subsection 3.2, you saw that it is only the relative size of the weights that affects the value of the weighted mean. So instead of using the average expenditure of an item as its weight, the expenditure figures for the items can all be multiplied by the same factor to produce a new, more convenient, set of weights. For the RPI, this factor is chosen so that the sum of the weights is 1000. Table 19 shows the 2004 weights used in the RPI for the groups and subgroups. Notice that each group weight is obtained by summing the weights for its subgroups.
The sum of the weights for the CPI is also 1000. The 2004 weights for the CPI divisions are given in Activity 27.
| Group | Subgroup | Weight | Group weight |
|---|---|---|---|
| Food and catering | Food | 111 | |
| Catering | 49 | 160 | |
| Alcohol and tobacco | Alcoholic drink | 68 | |
| Tobacco | 29 | 97 | |
| Housing and household expenditure | Housing | 209 | |
| Fuel and light | 28 | ||
| Household goods | 71 | ||
| Household services | 59 | 367 | |
| Personal expenditure | Clothing and footwear | 51 | |
| Personal goods and services | 42 | 93 | |
| Travel and leisure | Motoring expenditure | 146 | |
| Fares and other travel costs | 21 | ||
| Leisure goods | 46 | ||
| Leisure services | 70 | 283 | |
| All items (i.e. the sum of the weights) | 1000 | ||
The list provided in Table 20 contains the major categories of goods and services included in the RPI. In the next (optional) Activity, you will be asked to complete the last three columns of the table to make rough estimates of your household's group weights.
The figures already in Table 20 were completed for a two-person household. Some of the figures were accurate, others were necessarily very rough estimates. Nevertheless, the household's weights give a reasonable indication of the proportion of the household's expenditure (in 2004) on the five main groups used in the RPI.
The total expenditure was £1301. So the group weights were calculated by multiplying all the group total expenditures by a constant factor of
, to ensure the weights sum to 1000. The weight for ‘Food and catering?, for example, is
Another way to calculate this is to multiply the proportion of monthly expenditure spent on food and catering by 1000. The proportion is
Since the total weight is 1000, the weight for ‘Food and catering? is
Notice that the group weights for this particular household differ quite considerably from those used in the RPI in 2004. In particular, a much greater proportion of expenditure is on ‘Food and catering? and a much smaller proportion is spent on ‘Alcohol and tobacco?.
| Expenditure and weights | Your expenditure and weights | |||||
|---|---|---|---|---|---|---|
| Expenditure 2004 (£) | Group totals (£) | Group weights | Expenditure last year (£) | Group totals (£) | Group weights | |
| Food and catering | ||||||
| —at home | 270 | — | ||||
| —canteens, snacks and take-aways | 65 | — | ||||
| —restaurant meals | 15 | — | ||||
| 350 | 269 | ______ | ______ | |||
| Alcohol and tobacco | ||||||
| —alcoholic drink | 6 | — | ||||
| —cigarettes and tobacco | 0 | — | ||||
| 6 | 5 | ______ | ______ | |||
| Housing and household expenditure | ||||||
| —mortgage interest/rent | 89 | — | ||||
| —council tax | 76 | — | ||||
| —water charges | 32 | — | ||||
| —house insurance | 22 | — | ||||
| —repairs/maintenance/DIY | 30 | — | ||||
| —gas/electricity/coal/oil bills | 100 | — | ||||
| —household goods (furniture, appliances, consumables, etc.) | 50 | — | ||||
| —telephone bills | 15 | — | ||||
| —school and university fees | 0 | — | ||||
| —pet care | 0 | — | ||||
| 414 | 318 | ______ | ______ | |||
| Personal expenditure | ||||||
| —clothing and footwear | 40 | — | ||||
| —other (hairdressing, chemists' goods etc.) | 8 | — | ||||
| 48 | 37 | ______ | ______ | |||
| Travel and leisure | ||||||
| —motoring (purchase, maintenance, petrol, tax, insurance) | 160 | — | ||||
| —fares | 140 | — | ||||
| —books, newspapers, magazines | 60 | — | ||||
| —audio-visual equipment, CDs etc. | 20 | — | ||||
| —toys, photographic and sports goods | 3 | — | ||||
| —TV purchase/rental, licence | 0 | — | ||||
| —cinema, theatre, etc. | 20 | — | ||||
| —holidays | 80 | — | ||||
| 483 | 371 | ______ | ______ | |||
| 1301 | 1000 | ______ | ______ | |||
This activity is optional.
Make rough estimates of your own household's expenditure to complete the final columns of the checklist in Table 20. Estimate your household's monthly expenditure last year on each of the five main groups, and calculate your household's group weights. If you have no idea at all for a category, then use the corresponding figure in Table 20 as a starting point for your own and adjust it up or down depending on how you think you spend your money. One way of checking that your figures are sensible is to consider how the sum of the expenditures relates to your household's monthly income. Do not spend more than fifteen minutes on estimating your expenditure; accurate figures are not needed. For some categories, you may find it easier just to make a rough estimate of, say, your annual expenditure and divide by twelve.
Total your monthly expenditure. Then divide each group expenditure by this total and multiply by 1000 to calculate your household's group weights.
How do your household's weights compare with those used in the RPI in 2004?
Every household will be different, but think about the reasons for any large differences between your weights and those for the RPI.
The purpose of this activity is to help you to describe in your own words some of the important points about the RPI that have been discussed so far in this section. You should write your answers in a couple of sentences, to form a clear summary of these points.
(a) The RPI reflects changes in the price of a fixed basket of goods,
(i) What does this basket of goods represent?
(ii) What do the weights of the items in the basket represent?
(iii) Why is it necessary to change the contents of the basket from time to time?
(iv) What information is used to obtain the weights of the items in the basket?
(b) Before looking at the comments and reading on, take a minute or two to read what you have written. Then ask yourself the following questions.
(i) Is what you have written clear?
(ii) Are your answers informative? (That is, are they self-explanatory? Or would you have to read the question in order to understand what they are trying to say?)
(iii) Does what you have written actually make sense?
(iv) And finally, have you actually answered the question asked or a slightly different one?
As you meet new ideas and develop problem-solving skills, try to develop the skill of communicating your ideas clearly and concisely. Solving a problem is not a very useful activity in itself unless you can explain what you have done and report your results to others. The main way to develop communication skills is to practise them.
Now take a look at the comments for this activity.
(a)
(i) The basket of goods used in the construction of the RPI represents the way that a typical index household spends its money. All households except high-income households and those of pensioners are classed as index households.
(ii) The weights of the items in the basket reflect the spending patterns of households; the weight of an individual item represents the proportion of expenditure on that item.
(iii) The contents of the basket are changed from time to time to ensure that all the items still feature in a typical household's shopping basket, and to allow for new items to be included as they become important items of expenditure.
(iv) Data collected in the Expenditure and Food Survey are used to obtain estimates of the average expenditure (of an index household) on each item in the index; these figures are used as weights (after being adjusted so that their sum is 1000).
There are no comments on part (b).
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