Retail price index (UK)

In the United Kingdom, the retail prices index or retail price index (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services.

As the RPI was found not to meet international statistical standards, since 2013 the Office for National Statistics no longer classifies it as a "national statistic", emphasizing the consumer price index instead.

History

RPI was first calculated for June 1947. It was once the principal official measure of inflation. It has been superseded in that regard by the Consumer Price Index (CPI)

The RPI is still used by the government as a base for various purposes, such as the amounts payable on index-linked securities including index-linked gilts, and social housing rent increases. Many employers also use it as a starting point in wage negotiation. It is no longer used by the government as the basis for the indexation of the pensions of its former employees. The UK state pension (at 2012) is indexed by the highest of average earnings, CPI or 2.5% ("the triple lock").

Price index

A price index (plural: “price indices” or “price indexes”) is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these price relatives, taken as a whole, differ between time periods or geographical locations.

Price indexes have several potential uses. For particularly broad indices, the index can be said to measure the economy's general price level or a cost of living. More narrow price indices can help producers with business plans and pricing. Sometimes, they can be useful in helping to guide investment.

Some notable price indices include:

History of early price indices

No clear consensus has emerged on who created the first price index. The earliest reported research in this area came from Welshman Rice Vaughan who examined price level change in his 1675 book A Discourse of Coin and Coinage. Vaughan wanted to separate the inflationary impact of the influx of precious metals brought by Spain from the New World from the effect due to currency debasement. Vaughan compared labor statutes from his own time to similar statutes dating back to Edward III. These statutes set wages for certain tasks and provided a good record of the change in wage levels. Vaughan reasoned that the market for basic labor did not fluctuate much with time and that a basic laborers salary would probably buy the same amount of goods in different time periods, so that a laborer's salary acted as a basket of goods. Vaughan's analysis indicated that price levels in England had risen six to eightfold over the preceding century.

Price

In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.

In modern economies, prices are generally expressed in units of some form of currency. (For commodities, they are expressed as currency per unit weight of the commodity, e.g. euros per kilogram.) Although prices could be quoted as quantities of other goods or services this sort of barter exchange is rarely seen. Prices are sometimes quoted in terms of vouchers such as trading stamps and air miles. In some circumstances, cigarettes have been used as currency, for example in prisons, in times of hyperinflation, and in some places during World War 2. In a black market economy, barter is also relatively common.

In many financial transactions, it is customary to quote prices in other ways. The most obvious example is in pricing a loan, when the cost will be expressed as the percentage rate of interest. The total amount of interest payable depends upon credit risk, the loan amount and the period of the loan. Other examples can be found in pricing financial derivatives and other financial assets. For instance the price of inflation-linked government securities in several countries is quoted as the actual price divided by a factor representing inflation since the security was issued.