vand wrote:MDW1954 wrote:vand wrote:The increasing spread between the RPI and CPI is beginning to smell a bit fishy, but not at all surprising. There's a reason they changed the official measure, after all.
There's a perfectly simple explanation:The CPI calculates the average price increase as a percentage for a basket of 700 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets. Note that unlike the RPI, the CPI takes the geometric mean of prices to aggregate items at the lowest levels, instead of the arithmetic mean. This means that the CPI will generally be lower than the RPI. The rationale is that this accounts for the fact that consumers will buy less of something if its price goes up, and more if its price goes down; it also ensures that if prices go up and then revert to the previous level, the CPI also reverts to its previous level (which is not the case with the calculation method used for the RPI). According to the ONS, this difference in averaging method is the largest contributing factor to the differences between the RPI and the CPI.[4]
Source: https://en.wikipedia.org/wiki/Consumer_ ... ed_Kingdom)
As prices are going up faster, CPI's use of the geometric mean serves to widen the gap between CPI and RPI.
MDW1954
While this may explain the increasing spread, you then have to question altogether if CPI is fit for purpose during times of higher inflation.. after all, the stuff that is going up the most like food, petrol and utilities don't have easy substitutes.
It's RPI that's not fit for purpose, not CPI - fashionable though it is every time inflation widens for many to claim it is the better methodology.
Food petrol and utilities do have substitutes. One of which is buying less of it. That's not a moral or judgemental comment, simply a typical and understandable human behaviour as a consequence of that price rise. It has to be taken into account when measuring inflation. In not doing so you are measuring something else (albeit closely linked to inflation, which is an economic term).