---

Treasury;Office for National Statistics

Answer

Mr. Arbuthnot: To ask the Chancellor of the Exchequer how the calculations of the (a) RPI and (b) CPI made by the Office for National Statistics take into account changes in the standard quantities of the representative commodities contained in the indices. [200591] Mr. Timms: The information requested falls within the responsibility of the National Statistician, who has been asked to reply. Letter from Len Cook to Mr. James Arbuthnot, dated 30 November 2004: As National Statistician, I have been asked to reply to your parliamentary question asking how the calculations of the RPI and CPI made by the Office for National Statistics take into account changes in the standard quantities of the representative commodities contained in the indices. (200591) Within each year, the RPI and CPI are fixed quantity consumer price indices. That is, changes in prices as measured by both indices are calculated as the change in the total cost to the average consumer of a basket of goods and services of fixed composition, quantity and quality. In practice, this is achieved by (a) holding constant each year the sample of representative goods and services for which prices are collected each month in estimating price changes more generally; and (b) applying a fixed set of weights to price changes for each of the items such that their influence on the overall index reflects their importance in the typical household budget. In this way, changes in the RPI and CPI indices from month to month reflect only changes in prices, and not ongoing variations in consumer purchasing patterns. However, the contents of the RPI and CPI baskets of goods and services and associated expenditure weights are updated annually so that the indices remain representative of consumer spending patterns over time. This is important in helping to avoid potential biases in consumer price indices that might otherwise arise, for example, due to the development of entirely new goods and services, or the tendency for consumers to substitute purchases away from those particular goods and services for which prices have risen relatively rapidly. For the RPI, changes to the items and weights are introduced in February each year, but with an overlapping collection of prices in January. This means that the figures for each year can be `chain linked' together to form a long-run price index spanning many years. This procedure ensures that the annual changes to the basket and weights have no impact on estimated changes in prices as measured by the RPI. The same basic approach is likewise adopted in the CPI although, for technical reasons, it is necessary to chain link the published index twice each year rather than only once as in the RPI. These issues are described in greater detail in a range of articles published by ONS, which are available on the National Statistics website. The basic principles underlying the construction of the RPI and CPI are described in: David Roe and David Fenwick (2004) `The New Inflation Target: the Statistical Perspective', Economic Trends No 602, http://www.statistics.gov.uk/cci/article.asp?id=688 The basket of goods and services employed in the calculation of ONS consumer price indices and the associated weights are described respectively in: David Roe (2004), `Consumer Prices Index and Retail Prices Index: the 2004 Basket of Goods and Services', http://www. statistics.gov.uk/CCI/article.asp?ID=864 David Baran (2004), `Consumer Prices Index and Retail Prices Index: Updating weights for 2004', http://www.statistics.gov. uk/cci/article.asp?id=891

Secondary information

Type

Written question

Reference

428 c96-7W;428 c96-8W; 200591

Session

2004-05

Subjects

Prices Consumer prices index Retail prices index

Link

View this Written question on www.publications.parliament.uk