Inflation and the baskets

Reviewed 14 October 2026

Okenitemode explains how UK indicators are built and read. Nothing on this page is a forecast, a recommendation, or a substitute for the official statistical bulletin. Worked numbers below are invented so the arithmetic is visible. They are not Office for National Statistics figures.

Three abbreviations, three baskets

The Office for National Statistics publishes several consumer-price indices. The ones that dominate UK debate are:

• CPI. The Consumer Prices Index, aligned with international practice. The Bank of England’s inflation target is set in terms of CPI.
• CPIH. CPI plus owner-occupiers’ housing costs and Council Tax. The ONS treats CPIH as its lead measure of consumer-price inflation because housing is a large part of what households pay for.
• RPI. The older Retail Prices Index. Its formula and its housing treatment differ. It has known shortcomings, yet it still appears in some contracts, leases, and gilt conventions. Do not treat RPI and CPI as interchangeable spellings.

Each index is a weighted average of price changes. Weights come from how households spend, and they are updated. A rise in the price of something you personally do not buy can still move the national index. A rise in something you buy a great deal of can dwarf the index. The index is a national average, not your receipt.

A four-item basket

Suppose a fictional basket is 40 percent bread, 30 percent rent, 20 percent bus fares, and 10 percent coffee. Over a year the prices rise by 2 percent, 5 percent, 0 percent, and 10 percent.

The weighted inflation rate is 0.40 times 2, plus 0.30 times 5, plus 0.20 times 0, plus 0.10 times 10. That is 0.8 plus 1.5 plus 0 plus 1, which is 3.3 percent. Coffee rose fastest and barely moved the index. Rent did more of the work because the weight is larger. This is why “the thing that went up in the news” is often not the thing that moved CPI.

The rate and the level

If inflation falls from 6 percent to 3 percent, prices are still rising. They are rising more slowly. Only a negative rate, deflation, means the basket costs less than a year earlier. Disinflation is the slowing. Deflation is the fall. Headlines mix them.

Base effects make the rate jump around even when this month’s shops feel calm. A large price rise that drops out of the twelve-month window can pull the annual rate down without any new generosity at the till. Always ask what fell out of the comparison, not only what happened this month.

Core, energy, and housing

Core CPI usually excludes energy, food, alcohol, and tobacco, because those prices jump for reasons that are not the slow domestic trend. It is a diagnostic, not a claim that food does not matter. Energy can dominate the headline for a year and then vanish from the rate as the base effect turns.

Owner-occupiers do not pay a rent bill, but they consume housing. CPIH estimates those housing costs. CPI leaves more of that experience out. If you are comparing a British number with an American one, check whether housing is treated the same way before you announce that one country has “worse inflation”.

What the target is doing

The Monetary Policy Committee is tasked with CPI inflation of 2 percent. The target is not zero, because a small positive rate leaves room for relative prices to change and reduces the chance that the economy slips into a general fall in prices. Missing the target is visible and discussed; the existence of the target does not mean every month will print 2.0. For how Bank Rate is meant to tug inflation back, read the Bank Rate note.