Inflation, prices and the economy: statistics terms explained

The price indices, GDP measures and Bank of England tools that sit behind most economic claims.

CPI (Consumer Prices Index)

The UK's main measure of consumer price inflation for the Bank of England's 2% target. It tracks the prices of a basket of goods and services bought by households.

The Consumer Prices Index (CPI) measures the average change in prices of a representative basket of goods and services bought by UK households. The ONS publishes it monthly. The government's inflation target for the Bank of England is 2% on the CPI measure.

Worked example

If the hypothetical CPI index is 130.0 this September and 126.0 last September, annual CPI inflation is (130.0 minus 126.0) divided by 126.0, about 3.2%. That is the year-on-year rate quoted in news reports.

Key features

CPI is built to international standards, so it can be compared with other countries' harmonised indices.
It excludes owner-occupiers' housing costs and council tax. CPIH adds them.
The basket is reviewed each year to reflect changing spending.

How it trips up claims

CPI inflation falling means prices are rising more slowly, not that prices are falling.
An individual household's inflation can differ from CPI depending on what it buys.
CPI, CPIH and RPI give different rates for the same month; check which is quoted.

See the latest CPI figure.

Also searched as: consumer prices index, CPI inflation, what is CPI, inflation rate UK

Official definitions: ONS: Consumer price inflation, latest bulletin · Bank of England: Inflation and the 2% target · ONS: CPI annual rate (D7G7)

CPIH

The Consumer Prices Index including owner occupiers' housing costs. The ONS's lead measure of consumer price inflation, it adds housing costs and council tax to CPI.

CPIH is the Consumer Prices Index including owner occupiers' housing costs (OOH) and council tax. The ONS describes it as its most comprehensive measure of consumer price inflation and uses it as the lead measure in its monthly bulletin.

How the housing costs are measured

Owner occupiers' costs are estimated using rental equivalence: what it would cost to rent an equivalent home. House purchase prices and mortgage interest payments are not included directly.

Worked example

Suppose a hypothetical basket without housing rose by 3% and the housing component, with a weight of about a sixth, rose by 6%. CPIH would be roughly (5/6 x 3%) + (1/6 x 6%) = 3.5%, above the CPI-style figure because the heavier-weighted housing costs rose faster. When rents rise more slowly than other prices, CPIH can sit below CPI.

How it trips up claims

The Bank of England's target is set on CPI, not CPIH.
Because CPIH uses rents rather than mortgage payments, a rise in mortgage rates does not feed directly into it.
Many real-terms comparisons of incomes use CPIH; check the deflator named in the source.

See the latest CPIH figure.

Also searched as: CPIH inflation, consumer prices index including housing, owner occupiers housing costs, what is CPIH

Official definitions: ONS: Consumer price inflation, latest bulletin · ONS: Consumer price inflation quality and methodology information · ONS: CPIH annual rate (L55O)

RPI (Retail Prices Index)

An older UK price index still used in some contracts, index-linked gilts and student loans. It is not an accredited official statistic and usually runs above CPI.

The Retail Prices Index (RPI) is the UK's oldest measure of consumer price inflation. The ONS still publishes it because it is written into existing contracts, index-linked gilts and some regulated prices, but RPI lost its National Statistics status in 2013 and the ONS does not recommend it as a measure of inflation.

Why it differs from CPI

RPI uses a different formula for combining prices that the ONS has found tends to produce a higher rate (the "formula effect").
RPI includes mortgage interest payments and some housing costs that CPI leaves out.
It covers a slightly different population of households.

Worked example

If a hypothetical contract rises each year by RPI at 4% rather than CPI at 3%, over ten years the payment grows by about 48% rather than 34%. Small annual gaps compound.

How it trips up claims

Quoting RPI alongside CPI figures for other years mixes measures.
The UK Statistics Authority and HM Treasury have announced that the methods of RPI will be aligned with CPIH from 2030.

See the latest RPI figure.

Also searched as: retail prices index, RPI inflation, RPIX, what is RPI

Official definitions: ONS: RPI all items index (CHAW) · ONS: Shortcomings of the Retail Prices Index as a measure of inflation · ONS: Consumer price inflation quality and methodology information

Core inflation

Inflation measured without the most volatile items, usually energy, food, alcohol and tobacco, to show underlying price pressure.

Core inflation removes the components of a price index whose prices swing most from month to month. In the UK the ONS core CPI measure excludes energy, food, alcoholic beverages and tobacco. The aim is to show the underlying trend that is less affected by global energy or food shocks.

Worked example

In a hypothetical month, headline CPI is 4% because energy prices jumped, while core CPI is 2.5%. That tells you much of the headline rate came from energy. If energy prices then fall back, headline inflation may drop quickly while core inflation moves more slowly.

How it trips up claims

Core inflation is not what households pay overall; they still buy food and energy. The headline CPI rate covers the full basket.
The Bank of England's target applies to headline CPI, though its Monetary Policy Committee also looks at core and services inflation.
Definitions of "core" vary between countries, so international comparisons need care.

The ONS publishes core CPI as series DKO8 (CPI excluding energy, food, alcohol and tobacco).

Also searched as: underlying inflation, core CPI, inflation excluding food and energy

Official definitions: ONS: CPI excluding energy, food, alcohol and tobacco (DKO8) · ONS: Consumer price inflation, latest bulletin

Nominal GDP

Gross domestic product measured at current prices, without adjusting for inflation. Used for debt-to-GDP and spending-to-GDP ratios.

Nominal GDP (also called GDP at current prices or money GDP) is the total value of goods and services produced in the economy, valued at the prices of the time. It rises when either output or prices rise.

Worked example

If a hypothetical economy produces £1,000 billion of output one year, and the next year output volume is 1% higher while prices are 3% higher, nominal GDP is about £1,040 billion: up roughly 4%. Real GDP, measured as a chained volume measure, is up 1%.

Where it is used

Ratios such as debt as a percentage of GDP and spending as a share of GDP use nominal GDP, because debt and spending are also in cash terms.
International comparisons of economy size in dollars start from nominal GDP.

How it trips up claims

"The economy grew by 4%" may be nominal growth. Headline GDP growth in ONS bulletins is real growth.
High inflation raises nominal GDP, which can lower debt-to-GDP ratios even when debt in pounds is rising.

The ONS publishes nominal GDP as series YBHA.

Also searched as: GDP at current prices, money GDP, nominal vs real GDP, current price GDP

Official definitions: ONS: GDP at current prices, seasonally adjusted (YBHA) · HM Treasury: GDP deflators at market prices, and money GDP

Chained volume measure

The ONS method for showing GDP and other output after removing price changes, by linking year-to-year volume changes together. This is 'real' GDP.

A chained volume measure (CVM) shows how the quantity of output changes once price changes are removed. The ONS calculates volume growth for each year using the previous year's prices, then links ("chains") these growth rates together to form a continuous series expressed in the prices of a reference year.

Why chain?

Relative prices shift over time. Valuing everything at the prices of one distant year would over-weight goods that have since become cheaper, such as computers. Updating the weights each year keeps the measure relevant.

Worked example

Suppose hypothetical volume growth is 2% in year one and 1% in year two. Chaining gives cumulative growth of 1.02 x 1.01, about 3.0%. If the reference year level is £1,000 billion, the CVM series reads £1,020 billion and then about £1,030 billion.

How it trips up claims

Components of a CVM series do not always add exactly to the total, because of chaining. This is expected.
The pound levels depend on the reference year; growth rates are what matter.
Headline GDP growth in ONS bulletins is based on CVM figures, not nominal GDP.

The ONS publishes UK GDP as a chained volume measure in series ABMI.

Also searched as: CVM, real GDP, volume measure, constant price GDP, chain-linked

Official definitions: ONS: GDP chained volume measures, seasonally adjusted (ABMI) · ONS: Quarterly national accounts, latest bulletin

Purchasing power parity (PPP)

A conversion rate that reflects how much the same basket of goods costs in different countries, used to compare living standards and economy size internationally.

A purchasing power parity (PPP) is the rate at which one currency would need to be converted into another to buy the same goods and services in each country. PPPs are estimated through the International Comparison Program, led by the World Bank, and by the OECD and Eurostat.

Worked example

Suppose a hypothetical identical basket costs £80 in the UK and $120 in another country. The PPP is 1.5 dollars per pound. If the market exchange rate is 1.25 dollars per pound, converting UK GDP at market rates would understate what UK incomes buy relative to that country's, compared with converting at PPP.

When to use which

PPP-based comparisons are suited to living standards and volumes, such as GDP per head.
Market exchange rates are suited to things traded across borders, such as debt owed in foreign currency or aid budgets.

How it trips up claims

Rankings can change depending on which conversion is used. Check whether a league table uses PPP or market rates.
PPPs are estimates and are revised when new price surveys are completed.

See how to check international comparisons.

Also searched as: PPP, PPP exchange rate, GDP PPP, international dollars

Official definitions: World Bank: International Comparison Program · OECD: Purchasing power parities (PPP) · ONS: Improvements in the production of UK purchasing power parities data

Bank Rate

The interest rate the Bank of England pays on reserves held by commercial banks. Set by the Monetary Policy Committee, it is often called the base rate.

Bank Rate is the Bank of England's main policy interest rate: the rate it pays on reserves that commercial banks hold with it. It influences the rates banks charge and pay on loans, mortgages and savings. It is set by the Bank's Monetary Policy Committee (MPC), which has nine members and normally makes eight decisions a year.

Worked example

If Bank Rate rises by 0.25 percentage points and a lender passes this on in full to a hypothetical £100,000 variable-rate mortgage, annual interest rises by about £250. Fixed-rate borrowers are not affected until their fixed period ends.

How it trips up claims

"Base rate", "interest rate" and "Bank Rate" are used interchangeably in everyday speech; mortgage and savings rates set by lenders are different.
Changes are announced in percentage points or basis points. A cut "from 5% to 4.75%" is 0.25 points, not 0.25%.
The MPC's remit is to meet the 2% CPI inflation target set by the government.

The full history of Bank Rate decisions is on the Bank's database. See the current Bank Rate.

Also searched as: base rate, Bank of England interest rate, official bank rate, BoE base rate

Official definitions: Bank of England: Interest rates and Bank Rate · Bank of England: Official Bank Rate history · Bank of England: Upcoming MPC dates

Quantitative easing (QE)

The Bank of England's purchase of assets, mainly government bonds, with newly created central bank money to lower longer-term interest rates and support spending.

Quantitative easing (QE) is a monetary policy tool in which the Bank of England creates central bank reserves and uses them to buy assets, mostly UK government bonds (gilts). The aim is to lower longer-term borrowing costs and support spending so that inflation meets the 2% target. The Bank first used QE in 2009. Reversing it, by reducing the stock of bonds held, is known as quantitative tightening (QT).

Worked example

If the Bank buys a hypothetical £10 billion of gilts from investors, those investors receive £10 billion in bank deposits, and their banks receive £10 billion in reserves at the Bank of England. Higher demand for gilts tends to push up their prices and push down their yields.

How it trips up claims

QE is not the government printing money to spend: the Bank buys existing bonds in the market, and decisions are made by the independent Monetary Policy Committee.
Interest the Bank pays on reserves is linked to Bank Rate, so the effect of QE on the public finances changes as Bank Rate changes. The ONS and OBR report these effects.

Also searched as: QE, quantitative tightening, QT, asset purchase facility, money printing

Official definitions: Bank of England: Quantitative easing · Bank of England: Interest rates and Bank Rate

Quantitative tightening (QT)

The Bank of England reducing the stock of government bonds it bought under quantitative easing, by letting them mature and by selling them.

Quantitative tightening (QT) is the reverse of quantitative easing. The Bank of England shrinks the stock of gilts held in its Asset Purchase Facility, by not replacing bonds as they mature and by selling some back to the market. The Monetary Policy Committee votes each year on how much to reduce the stock over the following twelve months.

Why it matters when checking a claim

Effect on the public finances. When the Bank sells gilts for less than it paid, or pays more interest on reserves than it earns on gilts, HM Treasury covers the losses under an indemnity. These flows appear in public sector borrowing and are forecast by the OBR.
Separate from Bank Rate. QT is a different tool from Bank Rate; claims that it "raises interest rates" usually refer to its possible effect on gilt yields, which the Bank discusses in its own publications.

The Bank publishes the size of its gilt holdings and each year's QT decision with the relevant Monetary Policy Report.

Also searched as: QT, quantitative tightening meaning, quantitative tightening uk, gilt sales Bank of England

Official definitions: Bank of England: Quantitative easing · Bank of England: Monetary Policy Committee

GDP deflator

A measure of price change across the whole economy, used by HM Treasury to convert public spending figures from cash terms into real terms.

The GDP deflator measures how prices have changed across everything produced in the economy, not just the goods and services bought by households. It is calculated by dividing nominal GDP by real GDP (chained volume measure). HM Treasury publishes the series after each set of national accounts and at each fiscal event, including OBR forecast years.

Why it matters when checking a claim

The usual deflator for public spending. Real-terms comparisons of departmental budgets, such as NHS or school spending, are normally made with the GDP deflator. Using CPI instead can give a different answer.
It can behave oddly. In some years, unusual price movements in parts of the economy (such as government services or energy) push the deflator well away from consumer price inflation.
Check the vintage. The deflator is revised along with GDP, so real-terms figures calculated at different dates may not match.

See how to compare cash and real terms.

Also searched as: GDP deflator meaning, GDP deflator vs CPI, implied GDP deflator, whole economy inflation

Official definitions: HM Treasury: GDP deflators at market prices, and money GDP · ONS: Quarterly national accounts, latest bulletin

Output gap

The difference between what the economy is actually producing and an estimate of what it could produce sustainably. It cannot be measured directly.

The output gap is the difference between actual GDP and potential output, the level of production the economy could sustain without pushing inflation up or down. A positive gap means the economy is running above capacity; a negative gap means there is spare capacity.

Why it matters when checking a claim

It is estimated, not observed. Potential output has to be inferred from surveys, employment and other indicators. The OBR, Bank of England and international bodies such as the IMF and OECD each publish their own estimates, which can differ in size and even in sign.
It feeds into other figures. The structural deficit depends on the output gap, so a revised gap changes structural borrowing too.
Revisions are common. Estimates for past years are often changed substantially as more data arrive.

The OBR explains its method and publishes its estimate with each economic and fiscal outlook.

Also searched as: potential output, spare capacity, output gap meaning, positive output gap, negative output gap

Official definitions: Office for Budget Responsibility: Potential output and the output gap · Office for Budget Responsibility: Economic and fiscal outlook

Productivity

How much output the economy produces for each unit of input. The ONS headline measure is output per hour worked.

Productivity measures how much is produced for each unit of work or other input. The ONS headline measure is labour productivity: output (gross value added) per hour worked. It also publishes output per worker, output per job and multi-factor productivity, which takes account of capital as well as labour.

Why it matters when checking a claim

Which measure? Output per hour and output per worker can move differently, for example when average hours change.
Hours come from the Labour Force Survey. Problems with the Labour Force Survey have affected the hours data, so the ONS has flagged extra uncertainty in recent productivity estimates. Check the quality notes in the bulletin.
International comparisons need purchasing power parities and a common definition; the ONS publishes its own comparison, and the OECD publishes a harmonised series.
Public sector productivity is a separate ONS release with its own methods.

See how UK productivity is measured.

Also searched as: labour productivity, output per hour, productivity puzzle, UK productivity

Official definitions: ONS: Labour productivity · ONS: International comparisons of productivity

Technical recession

Two consecutive quarters of falling real GDP. A widely used rule of thumb rather than a legal or official definition.

A technical recession is usually defined as two consecutive quarters in which real GDP falls, measured with quarter-on-quarter growth in the chained volume measure. The ONS publishes the quarterly GDP figures; the label itself is a convention used by commentators and official bodies, not a statutory definition.

Why it matters when checking a claim

Revisions can remove or create one. First estimates of GDP are often revised. A small fall can become a small rise, so whether a recession happened can change months later. See revisions.
Monthly figures are not quarters. One or two months of falling GDP do not make a technical recession.
GDP or GDP per head? GDP can grow while GDP per head falls if population rises faster. Some claims about a "per head recession" use the per-head series.

For the latest position, see is the UK in recession.

Also searched as: recession definition uk, what is a recession, two quarters of negative growth, technical recession meaning

Official definitions: ONS: GDP first quarterly estimate, latest bulletin · ONS: Quarterly national accounts, latest bulletin

Current account (balance of payments)

The UK's net position on trade in goods and services, plus income flows such as investment earnings and transfers with the rest of the world.

The current account is part of the balance of payments. It records the UK's trade in goods and services, plus primary income (such as earnings on investments and pay of cross-border workers) and secondary income (transfers such as contributions to international organisations and remittances). A current account deficit means the UK is spending and paying out more abroad than it earns, financed by flows in the financial account.

Why it matters when checking a claim

Not the same as the trade deficit. The trade balance is only one component; investment income can widen or narrow the overall gap.
Not the same as the budget deficit. The current account concerns the whole economy's dealings with the rest of the world, not government borrowing.
Quarterly and revised. The ONS publishes it quarterly, usually as a share of GDP, and revises it often.

See what is the UK current account deficit.

Also searched as: current account deficit, balance of payments, current account meaning, primary income

Official definitions: ONS: Balance of payments · ONS: Quarterly national accounts, latest bulletin

Balance of trade

The value of a country's exports minus its imports. A negative balance is a trade deficit.

The balance of trade is exports minus imports, for goods, services or both. When imports are larger, there is a trade deficit. The ONS publishes UK trade monthly, and HMRC publishes detailed goods trade by product and partner country.

Why it matters when checking a claim

Goods only, or goods and services? The UK usually has a deficit in goods and a surplus in services, so the total can look very different from the goods-only figure.
Precious metals. Large movements of non-monetary gold through London can swing the totals. The ONS publishes figures excluding precious metals for this reason.
Different sources, different numbers. HMRC's trade in goods statistics count goods crossing the border; the ONS adjusts these to a balance of payments basis. Bilateral figures also differ from partner countries' own data.
Prices or volumes? A bigger deficit in current prices can reflect higher import prices rather than more imports.

See what is the UK trade deficit and the UK trade statistics guide.

Also searched as: trade deficit, trade balance, trade surplus, balance of trade meaning

Official definitions: ONS: UK trade, latest bulletin · HMRC: UK trade in goods statistics

Monetary Policy Committee (MPC)

The nine-member Bank of England committee that sets Bank Rate and decides on gilt purchases and sales to meet the government's inflation target.

The Monetary Policy Committee (MPC) is the Bank of England committee that sets Bank Rate and decides on quantitative easing and quantitative tightening. Its job is to meet the inflation target set by the government. It has nine members: the Governor, three Deputy Governors, the Chief Economist and four external members appointed by the Chancellor.

Why it matters when checking a claim

Votes are published. Each decision comes with the vote split and minutes, so claims about who voted for what can be checked directly.
Independent of ministers. Interest rate decisions are made by the MPC, not by the government, under the Bank of England Act 1998. The government sets the target.
Fixed dates. The Bank publishes its meeting dates in advance; see how often UK interest rates are reviewed.

Also searched as: MPC, Bank of England MPC, monetary policy committee members, MPC vote

Official definitions: Bank of England: Monetary Policy Committee · Bank of England: Upcoming MPC dates

Gross value added (GVA)

The value of goods and services produced, minus the cost of the inputs used to make them. GDP is GVA plus taxes on products, minus subsidies.

Gross value added (GVA) measures the contribution of an industry, area or the whole economy to output. It is the value of what is produced minus the value of the goods and services used up in producing it. For the whole economy, GDP equals GVA plus taxes on products (such as VAT) minus subsidies on products.

Why it matters when checking a claim

Regional and industry figures are usually GVA. Statements about the size of a sector, or of a region's economy, often use GVA rather than GDP. The two are not directly interchangeable.
Balanced or income measures. ONS regional estimates come in several forms, such as balanced GVA and GDP for ITL regions. Check which one a claim uses.
Workplace basis. Regional GVA is counted where work happens, so areas with many commuters in (such as central London) look larger per resident.

See how big is the UK economy.

Also searched as: GVA, GVA meaning, GVA vs GDP, value added

Official definitions: ONS: Quarterly national accounts, latest bulletin · ONS: Regional economic activity by gross domestic product