Understanding the Consumer Price Inflation indices: CPI, CPIH, and RPI
Taylor Humphrey
·April 22, 2024
As an ecommerce merchant, you know that your brand’s success is tied to your customers’ discretionary income – so it’s important to keep a close eye on economic indicators that help you understand how much spare cash your customers likely have available for spending.
In the United Kingdom, we have several important indices for measuring the impact of inflation on an ongoing basis: the Consumer Price Index (CPI), the Consumer Price Index including owner occupiers’ housing costs (CPIH), and the Retail Price Index (RPI).
In this article, we’ll talk about what goes into calculating these indices, and how you can use the data in your own business strategy to ensure that you’re remaining competitive in the current economic climate.
What are the key inflation indices, and how are they measured?
Each month, the Office for National Statistics (ONS) analyses current pricing data against historical metrics to uncover trends in inflation, using detailed and precise methodology.
The Consumer Prices Index (CPI) tracks the changes in the cost of a fixed collection of 700 different goods and services over time. This “shopping basket” includes a wide array of items reflecting the spending patterns of the average UK household, including various types of food, clothing, electricity, furnishings and furniture, alcoholic drinks, and fuel. It is updated with new additions and subtractions each year to reflect popular consumer items in the UK, such as the 2024 addition of air fryers, and subtraction of hand sanitiser. The CPIH rose by 3.4% from February 2023 to 2024.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) includes all of the same data as the CPI, but also factors in costs associated with owning, maintaining, and living in a home, including council tax. While the CPIH doesn’t factor in mortgage payments, it determines the “rental equivalence” for homeowners to rent their homes. The CPIH has been the primary inflationary measure used by the ONS since 2017, as it has the most comprehensive and accurate data. The CPIH rose by 3.8% from February 2023 to 2024.
The Retail Price Index is the oldest inflation index in the UK, and includes many of the same household goods and services as the CPI does, as well as mortgage interest payments. However, a different methodology is used to calculate the data, and the ONS now considers the RPI’s data to be less precise than the other indices. Nevertheless, it is still updated monthly because the metric is widely used in long-term contracts that were established before the other indices were in place. The RPI rose by 4.5% from February 2023 to 2024.
The data from all three indices is published in the ONS’ Consumer Price Inflation QMI. The Bank of England pays close attention to these metrics, and uses the data to aim to keep inflation rates at 2% or lower by increasing interest rates. (If it costs more to borrow, consumers are less likely to spend money they don’t have.)
Why is it important for ecommerce merchants to track consumer price inflation measures?
You may not be an economist, but that doesn’t mean you shouldn’t be paying close attention to these numbers.
Inflation data can have a measurable outcome on your business in numerous ways, and by factoring inflation metrics into your business intelligence, you can stay ahead of potential roadblocks and complications.
For example:
Get better insights on your buyers
Using CPIH and other inflation data helps you get an accurate snapshot on an average customer’s household finances, and how they’re being impacted by inflation. While you can’t drill down to different types of consumers and their geographic locations, the broad overview can still help you improve your buyer personas and understand where customers are spending their money.
Make strategic pricing decisions
Armed with the latest inflation data, you’ll be able to more easily assess whether it’s a good time to offer discounts or lower pricing to drive more business, or to raise prices in line with your competitors.
Understand your business’ rising costs
Although the CPI and other indices are focused on prices that the end consumer pays, they can also help you better analyse how and where your own costs are going up. For instance, by understanding how quickly costs like utilities and petrol are rising, you’ll be able to better budget for your own business expenses and ensure that you’ve built an adequate safety net to cover rising costs.
Determine employee pay rates
It’s important to make sure that you’re paying your employees a living wage, and the amount they need to cover basic expenses will change each year in line with inflation. Make sure that you’re paying all of your employees at least the UK’s real living wage as a baseline, and provide all of your staff with annual raises that match or exceed the pace of inflation. By ensuring that your staff is compensated fairly, you’ll be able to achieve higher retention and employee satisfaction.
Conducting your own inflation analysis
While the Consumer Price Inflation indices are helpful on a macro level, it’s also important to carefully track your own business cost data to understand trends in inflation and how they’re impacting your business, and come up with proactive measures to keep costs down.
For instance, by tracking the rising costs of returns, you’ll be able to understand where your business is increasing spending, and can identify ways to lower those costs using a returns management solution. Loop uses dynamic routing to identify the most cost-efficent routes and carriers to return items to your warehouse, helping you keep costs down. It can also help you determine situations where the cost of returning a product is higher than the resale cost, offering alternative disposal methods such as letting the customer keep the product or routing it to a nearby recycling facility.
By using integrated technology to track and manage your business expenses through the whole supply chain, you’ll gain access to insights that will help you adapt quickly to the impact of inflation, helping your business build and optimize a sustainable plan for long-term growth.
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