This article is from Jon Spain and Con Keating, intellectual powerhouses of this blog. It asks us took again at the relationship between RPI and CPI
Financial services professionals commonly state that, over the long term, RPI increases will exceed CPI increases by 1% pa. Having run www.ukrpi.com for 12 years (to be updated further soon), we’ve often wondered about that and we thought we’d look at the evidence again.
The UK CPI has been available since 1975 and we have looked at periods ending at the end of each calendar year, until 2021. Although CPIH (available since 1989) has become HMG’s preferred measure, the differences between CPI and CPIH are not significant. The numbers shown below are the per annum increase differences between RPI and CPI.
Comparing RPI with CPI over 1 year, the average has been 0.73%, with a standard deviation of 1.02%. As it occurs at the 60th percentile, it is not unreasonable to suggest that the expected difference could be as high as 1%.
However, comparing RPI with CPI over 15 years, the average has been 0.72% (virtually the same as over 1 year), with a standard deviation of 0.10%. A value of 1% would be 2.84 standard deviations away from the mean, which corresponds to a likelihood of 1 in 200, namely highly unlikely. Hence, 1% really cannot be taken as a best estimate.
Con Keating & Jon Spain