Inflation in the UK - Inflation Indices
There are two main inflation indices that are used in the UK to calculate the rate of inflation. These are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Both indices are calculated by looking at a wide range of goods and services, and working out how the cost of these goods and services have changed over a set period of time.
The CPI and RPI monitor the prices of slightly different goods and services, and their results are used for different purposes. The CPI is used as a benchmark for the UK government, which sets the Bank of England a target to ensure that the cost of living does not rise or fall too dramatically, so that the economy can grow effectively. The CPI is also used in order to compare the UK\'s rate of inflation with that in other countries.
The RPI, on the other hand, is used by the Government when considering increasing pensions and benefits, and is also often used as a guideline in wage or private contract negotiations.
One of the main problems with the current inflation indices in the UK is that they are based on average expenditure. Individuals will have different expenditure patterns and therefore may be affected by inflation in very different ways.
The current indices, for example, don\'t take into account the experiences of High Net Worth Individuals, as they are likely to have different spending patterns from the average householder.
High Net Worth Individuals are likely to spend a far lower percentage of their income on some basic goods, such as food and drink, than the average householder, but a far higher percentage of their income on luxury items, such as holidays, club memberships, jewellery, luxury cars and private school fees.
According to private bankers, Coutts, the rate of inflation on luxury goods and services between November 2006 and November 2007 was 9.5%, which was 7.4% higher than the CPI during that time. The bank has launched a new index, known as the Coutts Wealth Inflation Index, which is designed to calculate the rate of inflation for the types of products and services that High Net Worth Individuals are likely to buy.
With the number of High Net Worth Individuals growing, both in the UK and across the globe, this new index raises questions about exactly how accurate or relevant the CPI and RPI are.
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