Chart of the Week: UK RPI-CPI gap yawns

The wedge between the UK retail price index (RPI) and the consumer price index (CPI) widened to 3.3 percentage points in November, the highest it has been since records began in 1989. Typically, the RPI overstates inflation, for several reasons: because it uses different methods of aggregation, its choice of which items are included and the weights it attaches to those items. The widening gap is most probably a result of the rise in mortgage interest payments, an item that the RPI measure includes while the CPI does not. Mortgage interest payments were up 32.3% on the previous year in November. The widening RPI-CPI wedge is likely to become increasingly important, as the interest payments on index-linked gilts are linked to RPI rather than CPI. In addition, RPI is used to calculate student loan repayments, annual increases in rail fares and some pensions. The UK government plans to drop the RPI measure and replace it with measures based on the CPI in 2030 — a controversial decision that will save the government billions, without providing any form of compensation to bondholders.

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