Friday, 30 September 2011

UK Inflation Rate – The Affect of Compounding

We have all see the annual % change charts for inflation (both RPI and CPI in the UK),  just like the one shown below.  But have you ever really considered what those small differences between the % change in CPI and RPI means over the long term? 

Chart showing the annual per cent change in the retail price index RPI and consumer price index CPI from 2000 to 2011
Do you realise that over 10 to 20 year the compounded effect of those differences in the % change reported for RPI compared to CPI make a very big difference.  The easiest method to show this effect is to compare the RPI and CPI indexes.  An index will clearly shows the compounded change over time from the base year.  The guys over at have added a number of new charts and one in particular caught my eye.  This chart plotted the RPI index vs. CPI index since 1987 (shown below).
Chart of the retail price index RPI and consumer price index CPI since 1987 showing the effect of compound annual per cent changes between them. The chart shows that RPI has increased 2.4 time s since 197 compared to 2 times for CPI.
Historical RPI and CPI index data since 1987. Both index to January 1987 = 100.

This clearly illustrated the affect of compounding all those small % differences between CPI and RPI.  Over 24 year the RPI index has rose by factor of 2.4 whereas the CPi index has increased only by a factor of 2.

No comments:

Post a Comment