Inflation Calculator Guide

CPI vs RPI: Understanding UK Inflation Measures

The United Kingdom uses two primary measures of inflation, each calculated differently and serving distinct purposes. Understanding the difference between CPI and RPI is essential for anyone assessing the real impact of price changes on their finances.

Consumer Price Index (CPI)

CPI is the official measure of inflation used by the Bank of England and the UK Government. It tracks the price changes of a basket of around 730 goods and services that a typical UK household purchases, from groceries and clothing to transport and entertainment. CPI uses a geometric mean to calculate price changes, which tends to produce a lower figure than RPI. Since 2003, CPI has been the target measure for the Bank of England's Monetary Policy Committee, with a standing target of 2% per annum. When CPI strays more than one percentage point above or below this target, the Governor of the Bank of England must write an open letter to the Chancellor of the Exchequer explaining why and what action will be taken.

Retail Price Index (RPI)

RPI is the older measure, dating back to 1947, and includes housing costs such as mortgage interest payments and council tax that CPI excludes. RPI uses an arithmetic mean, which typically produces a figure 0.5 to 1 percentage point higher than CPI. Although the Office for National Statistics declared RPI a "legacy measure" and no longer classifies it as a National Statistic, it remains important because many financial contracts, index-linked gilts issued before 2030, student loan interest calculations, and some pension schemes still reference RPI. The UK Government plans to align RPI with CPIH (CPI including owner occupiers' housing costs) from 2030 onwards.

The Bank of England's 2% Target

The 2% CPI target was set by the Government and is symmetrical, meaning inflation that is too low is considered just as problematic as inflation that is too high. The Monetary Policy Committee meets eight times per year to decide the Bank Rate (base interest rate), which is the primary tool for controlling inflation. When inflation rises above target, the MPC may raise the Bank Rate to discourage borrowing and spending. When inflation falls below target, the MPC may lower the Bank Rate to stimulate economic activity. In extraordinary circumstances, the Bank has also used quantitative easing to influence inflation.

How Inflation Affects UK Savings and Pensions

Inflation directly erodes the purchasing power of cash savings. If your savings account pays 3% interest but CPI inflation is running at 4%, your money is losing real value at a rate of approximately 1% per year. Over a decade, this compounding effect can be substantial. For example, at 4% annual inflation, goods costing 100 pounds today would cost approximately 148 pounds in ten years.

For pension holders, the impact depends on the type of pension. The UK State Pension is protected by the triple lock, which guarantees it rises each April by the highest of CPI inflation, average earnings growth, or 2.5%. Defined benefit (final salary) workplace pensions typically increase in payment by CPI, though many older schemes use RPI. Defined contribution pensions, however, depend entirely on investment performance, making inflation a critical consideration for drawdown strategies.

ISA and savings account holders should compare the interest rate offered against the current CPI figure to determine whether their savings are growing in real terms. NS&I Index-Linked Savings Certificates, when available, offer returns directly linked to RPI, providing genuine inflation protection.

A Brief History of UK Inflation

The UK has experienced dramatic inflation swings over the decades. In the 1970s, inflation peaked at over 24% in 1975, driven by oil price shocks and wage-price spirals. The early 1980s saw aggressive monetary tightening under the Thatcher government, bringing inflation down but at the cost of deep recession. The 1990s introduced inflation targeting, bringing a period of relative stability. The 2008 financial crisis tested this framework, with CPI briefly turning negative. Most recently, the post-pandemic period of 2022-2023 saw CPI rise above 11%, the highest level in over 40 years, driven by energy prices and supply chain disruptions. By mid-2024, CPI had returned close to the 2% target.

Frequently Asked Questions About UK Inflation

What is the current UK inflation rate?

The Office for National Statistics publishes CPI and RPI figures monthly, typically in the third week following the reference month. You can find the latest figures on the ONS website. The Bank of England targets CPI at 2%, though actual rates fluctuate based on economic conditions.

Why does inflation feel higher than the official figure?

Personal inflation rates vary depending on spending habits. If you spend a higher proportion of your income on items experiencing above-average price rises, such as energy, rent, or food, your experienced inflation will be higher than the headline CPI figure. The ONS provides a personal inflation calculator that allows you to input your own spending patterns.

How does inflation affect my mortgage?

High inflation typically leads the Bank of England to raise the Bank Rate, which directly increases payments for those on tracker or standard variable rate mortgages. Fixed-rate mortgage holders are protected until their fix ends, at which point they remortgage at the prevailing rates. Historically, moderate inflation benefits mortgage holders because the real value of the debt decreases over time while property values tend to rise.

Should I invest during high inflation?

During periods of high inflation, holding large amounts of cash erodes purchasing power. Assets such as equities, property, and inflation-linked bonds have historically provided some protection against inflation over the long term, though all carry risk. Speaking with a qualified financial adviser regulated by the FCA is advisable before making significant investment decisions.