Price Index Peculiarity Resolved

Back in January, I posted about what appeared to be a peculiarity in the way the Consumer Price Index (CPI) was being presented by the Office for National Statistics (ONS). In several months the annual percentage change calculated directly from the published values of the CPI had been 0.1 % lower than the one being published. However, there wasn’t a problem in calculating the Retail Price Index (RPI) % change the same way.

This happened again when the CPI and RPI data for February 2011 appeared. But now, thanks to the kind assistance of Capital Economics, I have the explanation, which comes from the Consumer Price Indices Technical Manual 2010. The process used by the ONS for the RPI is to round the index figures down to the published single decimal place, and then calculate the % change (see the earlier post for the formula). For the CPI, the ONS uses unpublished figures with more decimal places to calculate the % change. The CPI index figures are published after rounding down to one decimal place. The implications of this are that the published indices cannot be used to calculate % changes – for successive 12 month periods the published % figures can be used, but to measure the CPI change over any other period, more exact values of the CPI have to be obtained from ONS. The justification for this can be found on page 80 of the Technical Manual:

The CPI follows the standard ONS approach which is to calculate derived statistics from unrounded monthly indices while the RPI calculations are based on the published rounded indices. The CPI approach limits the impact of rounding effects … and ensures that re-referencing will not in future lead to revisions to one-month and 12-month percentage changes.
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The RPI approach is transparent in that all derived statistics can be traced back to the published monthly index levels. This is particularly important given the wide range of uses to which the RPI is put including the indexation of state benefits and index linked gilts.

Since the Technical Manual was published the range of uses of the RPI has been reduced in favour of the alternative CPI, as will be discussed in the next post.