Interactive Investor

CPIH replaces CPI as preferred measure of inflation

3rd May 2017 12:56

Rachel Lacey from interactive investor


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Both indices monitor the price of a basket of goods that are representative of UK households’ spending habits to show how costs are changing over time. However, unlike the CPI, the CPIH also includes the costs of owning your own home based on its equivalent rental value, and council tax. In all other respects the indices are the same.

However, while the ONS regards CPIH as the most comprehensive index, because it includes housing costs, it is still not considered the ‘main’ measure of inflation.

This is because the CPIH does not, currently, have the necessary kitemark from the UK Statistics Authority to give it National Statistic status.

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In a statement on 10 March, the UK Statistics Authority (UKSA) said: “Although considerable progress has been made, ONS has not yet fully addressed some of the requirements in the Assessment Report, particularly related to comparisons with other sources, explanations of the methods of quality assurance and description of the weights used in the calculation of CPIH.”

The UKSA added that it will continue to take further evidence from the ONS and will continue to review the situation.

In response, the ONS issued a statement that said that its failure to secure National Statistic status would not prevent it from using CPIH as its preferred measure of inflation.

The Treasury still uses CPI as its measure of inflation for inflation rate targets for the Bank of England’s Monetary Policy Committee, which sets interest rates, and for increasing benefits including the State Pension. Under the triple-lock agreement the State Pension is guaranteed to increase each year by the higher of CPI inflation, wage growth or 2.5%. This is guaranteed until the end of this Parliament, which is likely to be 2020.

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It is not yet clear at this stage when, or if, the Treasury will convert to CPIH. A spokesperson for the Treasury said: “The government would need CPIH to have an established track record with National Statistic status before it would switch.” Although CPI was 2.3% for the year to March 2017, the same rate as CPIH, there is normally some difference between the rates, meaning that the rate adopted by the Treasury will have a material effect on the income received by pensioners and other benefit claimants.

Over the majority of the past decade CPIH has been marginally lower than CPI; however, since late 2014 CPIH has edged ahead.

The move from CPI to CPIH by the ONS is the first time it has changed its preferred measure of inflation since it dropped the Retail Prices Index (RPI) rate of inflation in late 2003. RPI is calculated in a different way and includes a different basket of goods – it is no longer a National Statistic and its use is discouraged by ONS.

However, it is still used in some cases, in particular for index- linked gilts (government loans) and by mobile phone providers to calculate annual increases for customers.

The graph below shows how inflation has changed over the last 11 years. Click on it to enlarge.

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

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