Consumer Price Index (United Kingdom)

The Consumer Price Index (CPI) is the official measure of inflation of consumer prices of the United Kingdom. It is also called the Harmonised Index of Consumer Prices (HICP).

The traditional measure of inflation in the UK for many years was the Retail Prices 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. The main index was described as the Interim Index of Retail Prices from 1947 to 1955. In January 1956, it was rebased and renamed the Index of Retail Prices. In January 1962 this was replaced by the General Index of Retail Prices, which was again rebased at that time. A further rebasing occurred in January 1987, subsequent to the issue of the first index-linked gilts.

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 election in May 1997, the new Labour government handed control over interest rates to the politically independent Bank of England Monetary Policy Committee. This committee is given the responsibility of adjusting interest rates in order to meet an inflation target set by the Chancellor. The initial target rate of inflation was an RPIX of 2.5%. The committee meets once per month to decide if any changes to the interest rate are necessary. If, in any month, inflation deviates from the target by more than one percentage point, the Governor of the Bank of England is required to write an open letter to the Chancellor explaining the reasons for this and to propose a plan of action for bringing inflation back towards the target.

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