The Construction of RPIY

This paper outlines the calculations used to construct the Bank of England's measure of retail price inflation, RPIY, which excludes the effects of indirect taxes on final consumption, mortgage interest payments and local authority taxation. This measure of inflation has been constructed in order to gain more insight into the movements in the Government's target measure of retail price inflation, RPIX, which excludes only mortgage interest payments. The technical reason for wanting to strip out the effects of taxation is similar to that for excluding mortgage interest payments from the target measure. An increase in indirect taxes will usually cause a step rise in the RPIX level (although often spread over a period of two or three months). This in turn will lead to a temporary increase in the 12 month inflation rate for at least a year. Hence tax changes introduce a "noise" element in the inflation rate. If one is concerned, with price inflation in the medium term then it is useful to know what the effect of this noise is. Starting with the May 1993 Inflation Report, we have been developing the RPIY so that we can understand how indirect tax changes are impacting on RPIX inflation. The paper represents our "signing off" from the responsibility for both calculating and publishing RPIY, as the CSO will be undertaking this from March 1995.