Inflation in the UK :The CPI, Core CPI, RPI and RPIX

Inflation, as measured by the year over year increase in the Consumer Price Index (CPI) was 2.78%, nine basis point over January, but still below December's high of 2.97%. This is the measure that the Bank of England focuses on in assessing its monetary policy. February marked the eleventh month that inflation exceeded the Bank of England's target of 2%. During that time, the Bank of England raised its key interest rate from 4.5% to 5.25%.

While the CPI measure of inflation is the target, other aspects of inflation come into play. Core inflation, defined as the Total CPI, less Energy, Food and Alcoholic Beverages, shows a more benign picture. This measure of inflation also rose nine basis points but remains well below the 2% level as can be seen in the first chart. The widening difference between the two series was largely due to rising prices of energy. It is only recently that the substantial fall in energy prices that has taken place over the past year is beginning to work its way into the consumers' energy bill.

A less sanguine outlook for inflation appears when one looks at the Retail Price Index (RPI). This measure of inflation was 4.58% in February , compared with 4.24% in January and 4.43% in December and was the highest inflation rate since August of 1991. The RPI, includes mortgage interest and council tax payments that are not included in the CPI. The RPIX excludes these items, but it still shows a higher rate of inflation than the CPI measure, as can be seen in the second chart. The difference is due to a combination of factors, including differences in coverage of goods and services, difference in the weights used and the formulas. In February, the rate of inflation in the RPIX was 3.68%, above January's 3.54%, but below December's 3.79%.

The RPIX was the official measure of inflation until December, 2003 when the Bank adopted the CPI and it is still used in wage negotiations and in the cost of living adjustments for government pension.