Consumer price inflation, UK: December 2016

The Consumer Prices Index (CPI) rose by 1.6% in the year to December 2016, compared with a 1.2% rise in the year to November.

The rate in December was the highest since July 2014, when it was also 1.6%.

Price movements for the majority of the broad groups of goods and services acted to increase the rate between November 2016 and December 2016.

The main contributors to the increase in the rate were rises in air fares and the price of food, along with prices for motor fuels, which fell by less than they did a year ago.

CPIH (not a National Statistic) rose by 1.7% in the year to December 2016, up from 1.4% in November.

We are improving the way we publish economic statistics, with related data grouped together under new “theme days”. This increases the coherence of our data releases and results in some minor changes to publication schedules. Today is the first inflation theme day and we have introduced a monthly economic analysis of the latest inflation statistics and long-term trends.

Consumer price inflation is the rate at which the prices of goods and services bought by households rise or fall. It is estimated by using price indices. A way to understand this is to think of a very large shopping basket containing all the goods and services bought by households. Movements in price indices represent the changing cost of this basket. An infographic explains how consumer price inflation is calculated, and Consumer price indices – a brief guide gives an overview of the indices and their uses. Consumer price indices are published monthly.

A price index can be used to measure inflation in a number of ways. The most common is to look at how the index has changed over a year. This is calculated by comparing the price index for the latest month with the same month a year ago. This is known as the 12-month inflation rate. This bulletin measures inflation to December 2016, so the 12-month rate measures changes in prices between December 2015 and December 2016.

A range of measures of consumer price and other price inflation are published. A tale of many price indices summarises information on the different measures.

What is the CPI?

The CPI is a measure of consumer price inflation produced to international standards and in line with European regulations. First published in 1997 as the Harmonised Index of Consumer Prices (HICP), the CPI is the inflation measure used in the government’s target for inflation.

The CPI is also used for purposes such as uprating pensions, wages and benefits and can aid in the understanding of inflation on family budgets. For more information see Users and uses of consumer price inflation statistics.

Latest figure and long-term trend

The CPI 12-month rate (the amount prices change over a year) between December 2015 and December 2016 stood at 1.6%. This means that a basket of goods and services that cost £100.00 in December 2015 would have cost £101.60 in December 2016.

The December rate of 1.6% is an increase on the November figure and is the highest since July 2014 when it was also 1.6%. At that time, the rate began to fall, subsequently remaining at or around zero for much of 2015 before gradually picking up from the end of the year and throughout 2016.

The largest downward pull on inflation in December 2016 and for 2016 to date comes from prices for food and non-alcoholic beverages, although this has lessened in recent months. November 2016 was the first time since mid-2014 that all non-food categories had an upward effect on inflation and this has continued in December 2016. Transport prices created a downward pressure during 2015 and early 2016 but have since become the largest upward pressure.

Prices economic commentary: Jan 2017 also published today, presents further analysis of the latest CPI, PPI, HPI and IPHRP results and emerging trends.

Figure 1 shows the contributions to the CPI 12-month rate in December 2016 compared with the contributions to the 12-month rate a year earlier.

Figure 2 shows the CPI 12-month rate for the last 10 years. Table 1 shows the CPI 1-month rate (the amount prices change between 2 consecutive months), 12-month rate and index values for the last year.

Consumer Prices Index (CPI): What are the main movements?

This section explains which goods and services had the biggest impact on the change to the 12-month rate between November and December 2016 and, where relevant, considers the longer-term inflationary trends for these goods and services.

The change in the CPI 12-month rate can be calculated by comparing the 12-month rates for 2 consecutive months. An alternative, and equally valid, approach is to calculate it by comparing the price change between the latest 2 months and the price change between the same 2 months a year ago. Explaining the contribution to change in the 12-month rate (2013) is a diagram explaining the calculation.

The CPI rose by 0.5% between November and December 2016, compared with a rise of 0.1% between the same 2 months a year earlier. The movement was therefore higher this year compared with a year ago, leading to a rise in the CPI 12-month rate.

Between November and December 2016, the majority of the broad groups of goods and services made an upward contribution to the change in the CPI 12-month rate and the downward contributions from the remainder were small. The main upward contributions came from the following groups:

Transport: prices, overall, rose by 2.9% between November and December 2016, compared with a rise of 1.8% a year ago. Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier. Although this year’s December rise was similar to that seen in 2015, the fact that air fares have a higher weight in the index in 2016 amplified the contribution to the change in the overall rate. Prices for motor fuels also had a large upward effect. This continues the pattern seen in recent months, reflecting movements in oil prices, which have increased overall during 2016. Although fuel prices fell slightly (by 0.4%) between November and December 2016, they fell by more (2.8%) between the same 2 months a year ago. Prices economic commentary: Jan 2017 presents further analysis.

Food and non-alcoholic beverages: prices, overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year. The upward effect came mainly from food (in particular vegetables), with prices increasing by 0.8%, having been unchanged a year ago. It is important to note that last year’s result was unusual; prior to this food prices had increased in every December since 2002. The increase in December 2016 is more typical of the movement generally seen at this time of year. We have seen consistent deflation of food prices for some time, with the 12-month rate having been negative since mid-2014 and often being lower than negative 3.0%. Although it is still negative, the rate is at its highest since July 2014 and has increased for 3 consecutive months. Prices economic commentary: Jan 2017 presents further analysis, including the relationship with the prices of goods bought and sold by manufacturers.

Figure 3 shows the contributions to change from each part of the CPI basket of goods and services.

On 10 November 2016, the National Statistician published a statement, confirming the intention that CPIH should become our preferred measure of inflation from March 2017. The Consumer Price Inflation Quality and Methodology Information page is a good starting point for understanding CPIH and how it relates to other measures of inflation.

CPIH has been re-assessed to evaluate the extent to which it meets the professional standards set out in the Code of Practice for Official Statistics and the assessment report published on 3 March 2016. The report includes a number of requirements that need to be implemented for CPIH to regain its status as a National Statistic. The actions taken to address these requirements were reported to the UK Statistics Authority at the end of September 2016, and a range of articles were published on 28 October 2016.

CPIH is a measure of UK consumer price inflation that includes owner occupiers’ housing costs (OOH). These are the costs of housing services associated with owning, maintaining and living in one’s own home. OOH does not include costs such as utility bills, minor repairs and maintenance, which are already included in the index. The CPIH compendium provides further information, including the rationale for the choice of methodology for measuring OOH, which is still extensively debated. We also publish data for alternative measures of OOH on a quarterly basis alongside the article Understanding the different approaches of measuring owner occupiers' housing costs.

CPIH uses an approach called rental equivalence to measure OOH. Rental equivalence uses the rent paid for an equivalent house as a proxy for the costs faced by an owner occupier. In other words, this answers the question “how much would I have to pay in rent to live in a home like mine?” for an owner occupier. OOH does not seek to capture increases in house prices. Although this may be inconsistent with some users’ expectations of measures of OOH, the inclusion of an asset price and therefore capital gains would make the index less suitable as a measure of consumption. OOH currently accounts for 16.5% of the expenditure weight of CPIH. This compares with a weight of 19.5% in 2005.

Currently, the method of calculation, the population coverage, the basket of goods and services and the method of deriving the weights are the same as for the Consumer Prices Index (CPI), with the exception of OOH. A full description of how CPIH is compiled is given in the Consumer Price Indices Technical Manual and the CPIH compendium.

In December 2016, the 12-month rate (the rate at which prices increased between December 2015 and December 2016) for CPIH stood at 1.7%, up from 1.4% in November 2016. The difference between the CPI and CPIH annual rates in December 2016 was 0.1 percentage points, down from 0.2 percentage points in November. The narrowing of the difference between CPI and CPIH is largely due to rounding; using unrounded growth rates, the difference was 0.2 percentage points for both November and December. Owner occupiers’ housing costs increased by 0.20% between November and December 2016, compared with 0.15% between these months a year earlier. This meant that they had a small upward impact on the change in the CPIH 12-month rate between the 2 months.

Figure 4 shows the CPIH and OOH component 12-month rates for the last 10 years. The CPI 12-month rate has been included for comparative purposes. Table 2 shows the CPIH and OOH component 1-month and 12-month rates and index values for the last year. More CPIH data are available in Tables 21 to 34 of the Consumer Price Inflation dataset.

In accordance with the Statistics and Registration Service Act 2007, the Retail Prices Index (RPI) and its derivatives have been assessed against the Code of Practice for Official Statistics and found not to meet the required standard for designation as National Statistics. The full assessment report can be found on the UK Statistics Authority website.

The RPI is a long-standing measure of UK inflation that has historically been used for a wide range of purposes such as the indexation of pensions, rents and index-linked gilts. For further information see Users and uses of consumer price inflation statistics.

RPIJ is a variant of the RPI and is calculated using formulae that meet international standards. The rationale for creating RPIJ was to give users a better alternative to the RPI if their needs were for a measure of inflation based on the same population, classifications, weights, etc as the RPI. Currently, RPIJ also acts as an analytical series in that it allows users to see the impact of using the Jevons (which meets international standards) in place of the Carli formula (which does not meet international standards) in the RPI. The use of the different formulae at the elementary aggregate level is currently the only difference between these indices. Detailed goods and services indices are not produced for RPIJ.

In December 2016, the 12-month rate for RPIJ stood at 1.8%, up from 1.5% in November.

The RPI 12-month rate for December 2016 stood at 2.5%, meaning that it was 0.7 percentage points higher than it would have been had it used formulae that meet international standards.

Figure 5 shows the RPI and RPIJ 12-month rates for the last 10 years. Over this period the RPIJ 12-month rate has been, on average, 0.6 percentage points lower than the RPI.

Table 3 shows the RPI and RPIJ 1-month and 12-month rates and index values for the last year.

If you would like to understand the causes of the difference between the CPI and RPI, please see Table 5 in the Consumer Price Inflation dataset.

Table 4 outlines where data for all consumer price inflation statistics can be found.

Understanding and accessing the data

The Consumer Price Inflation Quality and Methodology Information page, updated this month, provides a good starting point for understanding these statistics. It contains important information on:

• the strengths and limitations of the data and how it compares with related data
• users and uses of the data
• how the output was created
• the quality of the output including the accuracy of the data

A full description of how consumer price indices are compiled is given in the Consumer Price Indices Technical Manual. This is supplemented by further information available from the prices guidance and methodology webpage.

The mini Triennial Review of the CPI and RPI Central Collection of Prices is available.

All consumer price inflation data (including Excel dataset, time series data and explorable datasets) can be found on the dataset page.

To help you further, very detailed data are available, including the individual price quotes (for locally collected items only) and item indices that underpin the consumer price inflation statistics. The item indices behind the measurement of owner occupiers’ housing costs were included for the first time in the first quarter 2016 data. Please note the data that are published are at a level which means that no individual retailer or service provider will be able to be identified. These data have previously been released once a quarter with around a 2-month lag after the latest CPI publication. The frequency of publication has now changed, with data for October to December having been published today. From now onwards, data will be updated monthly at the same time as the headline information. For example, January 2017 information will be released on 14 February 2017.

Internationally, the CPI is known as the Harmonised Index of Consumer Prices (HICP). HICPs are calculated in each member state of the European Union (EU) according to rules specified in a series of European regulations developed by the European Commission (Eurostat) in conjunction with the EU member states. Eurostat releases figures for the Harmonised Index of Consumer Prices (HICP) for the month of December 2016 for EU member states, together with an EU average, on 18 January 2017. A summary of the latest European data is available from Eurostat’s database tables. Further information on HICP for the EU, Euro area and other EU member states is available from Eurostat's HICP web page.

Methods – CPI and other measures of inflation

The CPI, CPIH, RPIJ and RPI are compiled using the same underlying price data, based on a large and representative selection of around 700 individual goods and services for which price movements are measured in around 140 randomly selected areas throughout the UK. Around 180,000 separate price quotations are used every month to compile the indices. The outlets in which the prices are collected are selected randomly. Expenditure weights are held constant for 1 year at a time.

The selection of goods and services that are priced to compile these indices is reviewed annually. The contents of the 2016 basket are described in an article Consumer Price Inflation: The 2016 Basket of Goods and Services. The expenditure weights used to compile the indices are also updated each year. Additional details of the updated weights for 2016 are available in an article published on 22 March 2016 entitled Consumer Price Inflation: 2016 Weights.

Rates of change for the CPI and CPIH are calculated from unrounded index levels, rather than from the published indices which are rounded to 1 decimal place. The use of unrounded indices increases the accuracy of the calculation. The unrounded index levels for the CPI and CPIH are available from Tables 63 and 64 of the Consumer Price Inflation dataset. By contrast, rates of change for the RPI and RPIJ are calculated from the published rounded indices.

Further information on the methods used to construct the CPI, CPIH, RPI and RPIJ, including differences in the methods used for each index, can be found in the Consumer Price Indices Technical Manual. Users and uses of consumer price inflation statistics provides further details of how consumer price statistics are used more generally.