The UK Statistics Authority in 2013 examined one of the two official measures of inflation in Britain, the RPI (Retail Price Index), and concluded that the underlying formula for it was mathematically flawed. As a result, the RPI was formally stripped of its status as a National Statistic. The other measure of inflation, the CPI (Consumer Prices Index), kept its certification as a National Statistic and is now generally reported by the press as the main measure of inflation. And then, broadly, nothing changed.
RPI did not disappear. It runs alongside its main rival, the CPI (Consumer Prices Index), which remains a National Statistic and has become the headline measure of inflation. RPI is still used to calculate interest on some student loans, to increase the value of some index-linked savings and to uprate the pensions of certain groups. The same government treats the two measures as officially unequal. Both are used to determine whether your money is going up fast enough to keep pace with the rest of the world.
Why One of Them Is Actually Broken
These two statistics measure the change in price over time of a basket of typical goods and services that customers usually buy. The prices are averaged using two different methods, however. The CPI uses a geometric average, which is generally more reliable when individual items within a category are rising at different rates. The RPI uses an arithmetic average with a known, systematic upward bias. Therefore, it will report that prices are rising more quickly than they really are. Statisticians have long been aware of this, which is why the formal review of these statistics in 2013 took the route that it did.
The result is a persistent gap between the two figures, typically around 0.8 to 1 percentage point per year. In any single year, that sounds trivial. Across 30 years of a pension accumulation or a student loan, it compounds into a number worth paying attention to.
The Pattern of Which Ruler Gets Used for What
Student loan interest is calculated using RPI. Index-linked government savings bonds have traditionally followed RPI too, and some occupational pension schemes use RPI for annual increases. But the state pension has moved to using a CPI-based formula – the 'triple lock' uses the highest of CPI, % change in earnings, or 2.5%.
As a rough rule, RPI is used when you owe money, and CPI when the government owes you money (apart from rail fare caps, which were switched from RPI+1% to be set using a CPI formula in 2024).
Any honest reckoning with retirement planning sits right in the middle of this. How Old Should You Be Before Work Stops Owning You? is worth a read if you are working that out, because which index your pension tracks is part of the answer.
You're Beating Inflation. Which One, Though?
So when someone tells you your savings account is “beating inflation”, it’s useful to then ask them which one they mean. The growth rate of your savings account of 4% looks fine against a CPI of 3.2%. But it looks different if the financial obligations that most affect people’s lives – i.e. student loan interest, terms and conditions of certain contracts and even some pension calculations – have been rising at RPI, which has been running above 4% over the same period.
"Beating inflation" is not a single race. Inflation is measured on two slightly different tracks. Most people have no idea which track their financial obligations are racing on.
Frequently asked questions
Was my student loan really calculated on the flawed figure?
Most likely yes. For the period of the Plan 2 loans of the 2012 to 2023 intake years the interest rate charged on the debt was RPI plus 3% while the borrower was studying. Therefore in high-inflation years the debt would have increased by well over 10% annually. Borrowers on Plan 1 before 2012 had the interest rate set by the lower of RPI or 1%. Plan 5 loans for 2023 onwards intake years use only RPI. No percentage is added on top of RPI for these borrowers. For most of the last decade's graduates the faulty figure was the one running their debt.
Is the government planning to scrap RPI eventually?
This is sort of the case. A 2020 RPI consultation proposed to move RPI to be aligned with CPIH (a version of the CPI measure that includes housing costs) for purposes of index-linking on government bonds. However, this change will not affect the calculation of student loans and most other uses of RPI, and a modified version of RPI will continue to exist. The change is due to take place in 2030.
What is CPIH and why does it keep appearing?
CPIH is equal to CPI plus owner-occupiers’ housing costs. This can include items such as maintenance, buildings insurance and a notional rental of owned homes. The Office for National Statistics believes that this is the most complete measure of the three, and it generally runs slightly above the CPI measure. Most financial products are not based on CPIH, but if you are trying to work out whether your savings are keeping up with the cost of running a home in full, then CPIH is probably the best measure to use.
Can I ask which index a savings or pension product tracks?
This is a reasonable question to ask of any index-linked annuity or drawdown product before you commit to purchasing it. Some products offer the option of uplifts linked to either the CPI or RPI and generally these will be priced differently, the CPI version being cheaper because of the provider’s expectation that uplifts linked to the CPI will grow by less over time than those linked to the RPI. Note that “inflation-linked” is not a term that is used consistently across the industry, therefore it is worth asking whoever is selling the product which index is used for inflation-linking in any product that is being considered.
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