Retail Prices Index

The Retail Prices Index (also known as the RPI) is one of the United Kingdom's longest-running measures of inflation. For decades, it was the headline figure people turned to when they wanted to know how fast the cost of living was rising. It works by tracking the price changes of a representative “basket” of goods and services consumed by most households. Think of it as the nation's monthly shopping receipt. The RPI measures everything from the price of a loaf of bread and a pint of milk to petrol, clothing, and, crucially, housing costs like mortgage interest payments and council tax. While it has since been replaced by the Consumer Prices Index (CPI) as the UK's official inflation statistic, the RPI refuses to fade away. It remains deeply embedded in the UK's financial fabric, influencing everything from government bonds and pension payments to student loans and train fares, making it a vital concept for any investor to understand.

At the heart of the RPI is a concept straight out of a supermarket sweep: the “basket of goods”. The UK's Office for National Statistics (ONS) sends out researchers (or “price collectors”) each month to record the prices of around 700 specific items from various retailers across the country. This basket is designed to reflect the typical spending patterns of UK households. The contents are a mix of the mundane and the significant:

• Everyday Items: Food, drinks, toiletries, and petrol.
• Durable Goods: Cars, furniture, and televisions.
• Services: Haircuts, cinema tickets, and mobile phone contracts.
• Housing Costs: This is the big one. The RPI includes a range of costs associated with owning and occupying a home, most notably mortgage interest payments, council tax, and buildings insurance.

To keep up with the times, this basket gets a makeover every year. Items that have fallen out of fashion are dropped, and new ones that reflect modern life are added. For example, a DVD might be replaced by a subscription to a streaming service. This annual refresh ensures the index remains a relevant (if not perfect) snapshot of what people are actually spending their money on.

For an investor, simply knowing the RPI exists isn't enough. You need to understand how it differs from its younger, more famous sibling, the CPI, as this difference has real-world financial consequences.

While both measure inflation, the RPI and CPI are calculated differently, which often leads to the RPI figure being higher.

• Housing Costs: The most significant difference is that RPI includes owner-occupier housing costs, like mortgage interest payments. The CPI, on the other hand, does not. Because mortgage rates can be volatile, this single factor can cause a major divergence between the two figures.
• The Mathematical Formula: This gets a bit technical, but it's a crucial point. The RPI uses a mathematical formula (an arithmetic mean, for the curious) that has a known “upward bias.” The CPI uses a different formula (a geometric mean) that is considered more statistically robust. In simple terms, even if they were measuring the exact same price changes, the RPI's recipe tends to cook up a slightly higher inflation number over time.
• Who They Cover: The RPI excludes the top 4% of households by income and certain pensioner households who get a large part of their income from state benefits. The CPI covers almost all private households.

This isn't just an academic debate; the gap between RPI and CPI can directly impact your wallet.

• Bonds: Many long-term UK government bonds, known as index-linked gilts, have their interest payments and final principal value tied to the RPI. If you own one of these bonds, a higher RPI means a higher return. This makes them a popular tool for hedging against inflation.
• Pensions: Many older final salary pension schemes have their annual increases linked to RPI. While many newer schemes and state benefits now use the lower CPI, millions of people still have retirement incomes directly affected by the RPI.
• Contracts and Bills: From train fares to student loan interest and some mobile phone contracts, the RPI is still used as the benchmark for annual price hikes.

The official line from statisticians is that the RPI is a flawed measure and should be discontinued (the ONS plans to align it with a version of the CPI from 2030). So, should a value investor ignore it? Absolutely not. A savvy investor understands that what is and what should be are two different things. The RPI, for all its flaws, is still a powerful force in the UK economy. It continues to dictate the returns on billions of pounds worth of assets and the costs for millions of consumers. For a value investor, this creates opportunities.

1. Mispriced Assets: Does the market fully appreciate the future path of the RPI? An investor who believes RPI will remain stubbornly high might find value in RPI-linked gilts or stocks of companies with RPI-linked revenues (like some utility or infrastructure firms).
2. A Better Gauge of Reality?: While statistically imperfect, the RPI's inclusion of housing costs can, for many homeowners, feel like a more accurate reflection of their personal cost of living than the CPI. Using both indices gives an investor a more rounded view of the inflationary pressures in the economy.
3. Understanding Real Returns: Ultimately, inflation is the enemy of the investor because it erodes the purchasing power of your money. Knowing how different measures of inflation affect your various investments is fundamental to calculating your true rate of return. The RPI may be old and a bit quirky, but ignoring it means ignoring a key piece of the investment puzzle.