The Consumer Price Index (CPI) Explained

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The Consumer Price Index, or CPI, is used around the world to measure inflation. It uses the prices of a fixed set of goods and services to measure change over a set period of time. 

CPI is measured, recorded and published by the Office for National Statistics (ONS), and is used by the government for setting the inflation target. Although inflation can sometimes be seen in a negative light as it can mean an increase in prices, it can also be used as a spark to ignite the economy. 

Now more than ever, it’s important to have a basic knowledge of CPI and inflation so you can protect your savings and understand what impact different events can have on the economy.

The rundown
  • CPI, or the Consumer Price Index, is a way of observing how consumer spending habits and patterns have an effect on the rate of inflation.
  • Events which impact the economy, such as the coronavirus pandemic, affect different areas of tracked CPI, such as travel and recreational spending. 
  • With CPI a driving force behind inflation, it can also directly affect your personal savings.

What is the Consumer Price Index?

The Consumer Price Index, commonly known as the CPI, is one of three main estimates used to measure inflation. In the UK, the three main estimates are as follows:

  • The Consumer Prices Index (CPI)
  • The Consumer Prices Index including owner-occupiers’ housing costs (CPIH)
  • The Retail Prices Index (RPI)

The fixed set of goods and services observed in the CPI is often described as a ‘shopping basket’ of over 700 representative items that are reviewed each year. Sometimes, certain goods or services are removed or swapped to accurately represent consumer spending patterns. A good example of this was throughout 2020, where certain items such as travel were removed from the ‘basket’ due to the restrictions put in place by the coronavirus pandemic. 

The following table details the different items considered for the Consumer Prices Index including owner-occupiers housing costs (CPIH) in 2020. 

What is the current rate of CPI in the UK?

The current rate of CPI, recorded by the ONS in January 2024, is 4%. 


What factors affect CPI?

The main factor affecting CPI is consumer spending habits, meaning that any trends or changes in price that encourage or discourage consumer spending will have an effect on CPI. 

Establishing CPI during the current economic turmoil caused by the coronavirus pandemic poses several issues, including the following:

  • The ‘shopping basket’ of items used to measure CPI is no longer representative of actual consumer spending. Things such as eating out, travel, hotel stays and cultural services are far less relevant and therefore don’t carry as much weight, meaning some of the initial 2020 CPI figures are likely to be inaccurate. 
  • CPI statistics for 2021 and 2022 would normally be based on 2020 spending. With much of 2021 still very uncertain, it’s not clear whether 2020 can simply just be disregarded in terms of historical statistics, or if these patterns are likely to continue into 2022. 
  • Some fluctuations or increases in costs may not be successfully recorded. With supply of some goods being restricted due to the pandemic, coupled with the limitations of the Brexit transition, consumers are likely to be swapping their usual products for different, more expensive brands or shops. As CPI only tracks the usual prices in the usual locations, any increase actually felt by the consumer is likely to be understated. 
  • Ultimately, the gap in this actual increase and what is being recorded may lead to further issues with consumer welfare and standards of living.

Does CPI affect my savings?

CPI can affect savings by driving inflation up. If the rate of interest on your savings account is lower than the rate of inflation, you could effectively lose your money’s buying power. 

For example, if you have £200 in a savings account with an interest rate of 1%, you will have £202 the following year. However, if the rate of inflation is at 2%, you would need to have £204 to have the same buying power you started with.

The best way to safeguard your savings against inflation is to look for an account with a competitive, fixed rate of interest that beats the rate of inflation, such as fixed rate bonds. You can also find inflation-beating interest rates on notice accounts and easy access accounts, both of which offer a little more flexibility and easier access to your savings should you need it.

Where can I find inflation-beating savings accounts?

With many different types of savings accounts available, it’s important to shop around to find an inflation-beating savings account that’s right for you.

You’ll find a choice of inflation-beating fixed rate bond savings accounts on our marketplace. They’re available for terms of six months up to five years, and it’s typically the longer-term bonds that offer the most competitive interest rates.

Register for a Raisin UK Account

At Raisin UK, online banking is made easy thanks to a user-friendly dashboard which allows you to view all of your accounts with partner banks. 

You can quickly and easily apply for savings accounts with inflation-beating rates from a range of UK partner banks by registering for a Raisin UK Account and logging in to apply. Don’t forget that it’s free to open an account.

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