Consumer Price Index (United Kingdom)

The Consumer Price Index is the official inflation measure of the United Kingdom.

The traditional measure of inflation in the UK for many years was the Retail Price Index (RPI), which was first calculated in the early 20th Century to evaluate the extent to which workers were affected by price changes during the first world war. An explicit inflation target was first set in October 1992 by Chancellor of the Exchequer Norman Lamont, following the UK's departure from the Exchange Rate Mechanism. Initially, the target was based on the RPIX, which is the RPI calculated excluding mortgage interest payments. This was felt to be a better measure of the effectiveness of macroeconomic policy. It was argued that if interest rates are used to curb inflation, then including mortgage payments in the inflation measure would be misleading. Until 1997, interest rates were set by the Treasury.

On winning power in May 1997, the New Labour government handed control over interest rates to the Bank of England, whose Monetary Policy Committee now sets rates on the basis of an inflation target set by the Chancellor. If in any month inflation is more than one percentage point off its target, the Governor of the Bank of England is required to write to the Chancellor explaining why.

Since 1996 the United Kingdom has also tracked a Consumer Price Index figure, and in December 2003 its inflation target was changed to one based on the CPI. The CPI is currently 2.5%, while the RPIX (which excludes Mortgage Interest) is 3.3% and RPI is 4.3% (which includes Mortgage Interest). These figures are correct at May 2007. Both the CPI and the RPI are published monthly by the Office for National Statistics.