HICP

The Harmonised Index of Consumer Prices (HICP) is an inflation measure required by the EU. The HICP for the UK is called the Consumer Price Index (CPI). It is an important measure because the UK's inflation target is based on it. The Bank of England is required to set interest rates so as to keep inflation, as measured by the CPI, within a target range.

Historically, the CPI was calculated by the UK's Office of National Statistics (ONS) using a different methodology. The new CPI/HICP replaced the old CPI.

The differences between the CPI and other inflation measures such as the retail price index (RPI) can be important.

  • The CPI/HICP excludes costs related to home ownership such as mortgage interest, estate agents' fees and building insurance.
  • The RPI excludes costs paid by the highest income (top 4%) households, pensioners dependent on benefits, foreign visitors and students.

These differences reflect the different purposes of the measures. The CPI measures inflation for the purpose of setting economic policy. The primary users of HICP measures are the European Central Bank, the ank of England and other EU central banks. RPI measures the cost of living for ordinary households, and its uses include the index linking of social security payments and index linked gilts.

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