Rpix

Published Sep 8, 2024

Definition of RPIX

RPIX refers to the Retail Prices Index excluding mortgage interest payments. It is a measure of inflation that excludes the cost of mortgage interest payments from the UK’s broader Retail Prices Index (RPI). The RPIX provides a clearer picture of underlying inflation trends by removing the volatility associated with interest rate changes, which can significantly impact the overall RPI.

Example

To understand how RPIX works, consider a hypothetical scenario where the central bank decides to increase interest rates to curb inflation. This move would lead to higher mortgage interest payments, which would then be reflected in the RPI, causing it to spike. However, this spike might not accurately represent the broader inflationary trends in the economy, as it would be heavily influenced by the increased mortgage costs. In this scenario, the RPIX, which excludes these mortgage payments, would provide a more stable and accurate measure of underlying inflation.

Suppose in a given month, the RPI is reported at 3%, but a substantial portion of this increase is due to a recent rise in mortgage interest rates. The RPIX, which omits these costs, might show an inflation rate of only 2%. Policymakers and analysts would use the RPIX to gauge the inflationary pressures in the economy without the noise introduced by fluctuating mortgage interest payments.

Why RPIX Matters

The RPIX is crucial for policymakers, economists, and financial analysts as it offers a more stable measure of inflation than the broader RPI. By excluding mortgage interest payments, the RPIX helps to eliminate short-term volatility and provides a clearer picture of long-term inflation trends. This stability is essential for:

• Monetary Policy: Central banks rely on accurate inflation measures to set interest rates. The RPIX helps ensure that decisions are based on underlying economic conditions rather than temporary fluctuations in mortgage costs.
• Wage Negotiations: Employers and unions often use RPIX to adjust wages, as it better reflects the cost of living without the distortion caused by interest rate changes.
• Government Policy: Accurate inflation data helps in planning and implementing fiscal policies, ensuring that social benefits and pensions are adjusted to maintain their real value.

Frequently Asked Questions (FAQ)

How is RPIX calculated?

RPIX is calculated similarly to the Retail Prices Index (RPI) but excludes mortgage interest payments. The RPI is derived from a basket of goods and services representative of typical consumer expenditure. To compute RPIX, statisticians adjust the RPI by removing the cost of mortgage interest payments. This adjusted figure provides the RPIX, which is then used to measure the inflation rate excluding these volatile interest costs.

Why was RPIX introduced?

RPIX was introduced to offer a more stable and accurate inflation measure, free from the distortions caused by fluctuating mortgage interest payments. Interest rates are subject to frequent changes, driven by central bank policies and economic conditions. These changes can lead to significant fluctuations in the RPI, making it less reliable for assessing underlying inflation trends. By excluding mortgage interest payments, RPIX provides a clearer and more consistent metric.

What are the limitations of RPIX?

While RPIX offers several advantages, it also has limitations. One major limitation is that it may not fully capture housing cost inflation, as it excludes mortgage interest payments. This exclusion can be significant in economies where housing costs constitute a large portion of consumer expenses. Additionally, while RPIX stabilizes the measure of inflation by excluding mortgage costs, it may still be influenced by other volatile components, such as energy and food prices. Therefore, users must consider these factors and, in some cases, rely on other complementary inflation measures to obtain a comprehensive understanding of inflationary pressures.

How does RPIX differ from CPIH?

RPIX and CPIH are both measures of inflation, but they serve different purposes and exclude different components. While RPIX excludes mortgage interest payments, CPIH (Consumer Prices Index including owner occupiers’ housing costs) includes a broader measure of housing costs, such as rental equivalence for owner-occupied housing. CPIH aims to reflect the cost of owning, maintaining, and living in one’s home. Thus, CPIH can provide a more comprehensive measure of housing-related costs compared to RPIX, which focuses on excluding the volatility from mortgage interest payments. Both measures are valuable for different analytical purposes and provide complementary insights into inflation trends.

How often is RPIX updated?

RPIX is updated monthly, just like the RPI. The Office for National Statistics (ONS) in the UK typically releases these updates, providing the latest data on RPIX and RPI. This regular updating ensures that policymakers, analysts, and the public have access to timely and relevant information for making informed decisions based on current inflation trends.

RPIX serves as a reliable measure of underlying inflation, offering key insights for economic decision-making by focusing on the broader cost of living while excluding volatile mortgage interest payments. Understanding and utilizing RPIX helps provide a stabilized view of inflation, essential for informed monetary and fiscal policy decisions.