Search
  1. Home
  2. Personal Finance Hub
  3. What is CPI (the Consumer Prices Index)?
Published 23 May 2024
Reading Time
7 minutes

What is CPI (the Consumer Prices Index)?

The index measures the annual change in average prices paid by consumers for a range of goods and services that represent regular expenses, like groceries or petrol.

The consumer prices index, or CPI, slowed to 2.3% in the year to April 2024, according to the Office for National Statistics (ONS). This rate is down from 3.2% in March 2024.

Amy Knight, personal finance writer and spokesperson for NerdWallet UK, said that consumers will be reassured that the rate of price hikes has calmed considerably. However, even though inflation has slowed, it’s still important to stick to your budget.

“The economic shocks that drove up inflation have tested the financial resilience of British households at all income levels. The cost of living has necessitated a more cautious approach to spending and those looking to build their financial fitness long-term may do well to hold onto those habits as we move into a more positive economic climate.”

The CPI measures the change in prices paid by UK consumers for everyday goods and services, like groceries, fuel and clothing. It compares the prices of goods and services now with how much they cost a year ago. It is calculated by the Office for National Statistics (ONS) and an updated figure is released each month. 

What is the current CPI rate?

The ONS report for April 2024 reveals that CPI in the UK is at 2.3%. This is hotter than market forecasts, which predicted CPI would fall to 2.1%. As a result an expected Bank of England base rate cut may not happen until later in the year, rather than June as initially hoped.

  • The annual CPI rate of 2.3% is at its lowest level since July 2021, when it sat at 2%.
  • Price rises for housing and household services continued to ease, sitting at an annual inflation rate of 2%. This reflects the lower prices of gas and electricity following the introduction of April’s energy price cap.
  • The annual rate of inflation for food and alcoholic beverages is the lowest since November 2021, at 2.9%. The inflation rate for this category was at a recent high in March 2023, when it was 19.2%.
  • Alcohol and tobacco prices rose by 8% in the year to April 2024, compared with 11.9% in the year to March.
  • Motor fuel prices fell by 0.3% in the year to April 2024, but this is a slower rate than in March, when they fell in the year by 3.7%. While the cost of diesel is lower than a year ago there has been a small rise in the price of petrol.
  • Core CPI – all items minus food, energy, alcohol and tobacco – rose by 3.9% in the 12 months to April 2024, down from 4.2% in March.

CPI rates history

MonthAnnual CPI rate
April 20238.7%
May 20238.7%
June 20237.9%
July 20236.8%
August 20236.7%
September 20236.7%
October 20234.6%
November 20233.9%
December 20234.0%
January 20244.0%
February 20243.4%
March 20243.2%
April 20242.3%

What is the UK target inflation rate?

It’s down to the Bank of England to keep inflation stable – the target inflation rate set by the government is 2%. The Bank of England attempts to influence inflation through monetary policy, including how much it costs to borrow by setting interest rates.

Inflation increased sharply throughout 2021 and 2022 following the end of coronavirus restrictions and the war in Ukraine. As the economy reopened following lockdowns, shifts in consumer demand and supply disruptions for certain goods (such as cars) all contributed to a rise in inflation, increasing the cost of living.

Then the war in Ukraine tightened the supply of oil, gas and grain, contributing to an increase in energy prices (and inflation) throughout 2022.

Since the end of 2023, inflation has gradually been falling back to the Bank of England’s target, with April 2024’s figure the closest it’s been since July 2021.

What is in the CPI ‘basket’?

The goods and services that the CPI measures are often referred to collectively as the ‘shopping basket’. This changes annually to reflect consumers’ behaviour and spending patterns.

There are more than 700 goods and services in the basket. Items include:

  • furniture, furnishings and carpets
  • alcoholic drinks
  • clothing 
  • food
  • electricity, gas and other fuels

In those broad segments are more specific categories, such as “milk, cheese and eggs” under food. 

And then there are actual items within specific categories, for example “non-dairy milk drinks and yoghurts” under “milk, cheese and eggs”.

Examples of items that were added in 2024 include “vinyl music”, reflecting the fact that more people are buying records, and “air fryers”, because these have become more popular in recent years. 

Examples of items that were removed in 2024 include “sofa beds”, reflecting the fact that pull-out beds have potentially become more popular, and “hand hygiene gel”, because demand has dropped since the coronavirus pandemic.

The difference between CPI and CPIH

The CPI is just one of a few indices used in the UK to measure inflation. The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is the headline measure used by the ONS.

The CPIH is almost the same as the CPI, but it also measures the change in the cost of owning, maintaining and living in your home, including council tax. Because it includes these costs, the ONS calls it the ‘most comprehensive measure of inflation’. 

However, it doesn’t include mortgage payments – instead, the ONS measures how much it would cost homeowners to rent their homes. This is called ‘rental equivalence’. 

The CPIH rose by 3% in the 12 months to April 2024, down from 3.8% in March.

The difference between CPI and RPI

RPI refers to the Retail Prices Index, which is the longest-standing measure of inflation in the UK.

It broadly measures the same goods and services as the CPI, but also includes mortgage interest payments. House prices and interest rates therefore affect the RPI.

While the CPIH includes the cost of owning, maintaining and living in your home, it doesn’t include mortgage interest payments as the RPI does. 

There’s another index derived from the RPI called the RPIX, which excludes mortgage interest payments. The RPIX was the UK’s lead inflation index until 2003, when it was replaced by the CPI.

The RPI and the CPI are calculated differently, using different methods of calculating average prices, as well as different formulae. 

The ONS believes that the RPI isn’t a great statistic, because it is likely to considerably overstate or at times understate inflation, and it discourages its use.

However, it still calculates and publishes the RPI monthly, because it’s used in long-term contracts and index-linked gilts. The government is planning to change the way that the RPI is calculated, bringing it in line with the CPIH, but this won’t happen before 2030.

The RPI rose by 3.3% in the 12 months to April 2024, down from 4.3% in March.

Some consumer costs are still linked to RPI inflation

While the ONS discourages its use, and the UK’s national statistician, Professor Sir Ian Diamond, has called it ‘not fit for purpose’, some elements of the UK economy are still linked to RPI inflation.

Items that bring in money for the government tend to be linked to the RPI figure, which is usually higher than the CPI figure. Consumer costs that increase in line with the RPI include car tax, tobacco duty, alcohol duty and interest on student loans. Some mobile phone tariffs and train tickets are linked to the RPI figure, too.

On the other hand, government spending tends to be linked to the lower CPI figure. This includes the state pension, universal credit and jobseekers’ allowance.

How is CPI used?

As mentioned above, the government uses CPI for the Bank of England’s target inflation rate. It’s also used when it reviews and uprates certain state benefits and tax thresholds.

The ONS also monitors wage growth in relation to the CPI and CPIH. As high inflation means that consumers have less purchasing power, the ONS measures how much wages have actually increased when taking the level of inflation into account.  

» MORE: What can you do about high UK inflation?

Image source: Getty Images

Dive even deeper

NerdWallet UK Survey: Retirement and Emergency Funds are the Most Popular Savings Goals

NerdWallet UK Survey: Retirement and Emergency Funds are the Most Popular Savings Goals

New research by NerdWallet UK reveals that a majority of UK adults have clear savings goals and are taking action to reach them.

UK Lifestyle Debt Worries Statistics

UK Lifestyle Debt Worries Statistics

Almost a third of UK adults feel pressure to spend more than they can afford, using credit cards, loans or overdrafts. New research shows that debt worries still affect those earning above the average salary.

Childcare Funding is Changing This Year: Make Sure Your Family Doesn’t Miss Out

Childcare Funding is Changing This Year: Make Sure Your Family Doesn’t Miss Out

The government’s Childcare Choices scheme is expanding, so more families stand to benefit from 15 or 30 hours funded childcare. But accessing what you’re entitled to isn’t always straightforward. We explain how to claim what you’re eligible for.

Back To Top