Uses of CPI/RPI Data:
- As economic indicator – CPI is widely used measure of price inflation, and therefore is measure of changes in cost of living. Governments try to control inflation using macro-economic policies. The CPI will be used by workers to seek wage increases, and used by entrepreneurs in business making concerning purchases and setting wage and prices.
- As a price deflator – Rising prices reduce purchasing power, value, of money. Rising prices can therefore affect real value of wages, profits, pensions, savings, interest payments, tax revenues and other economic variables important to people and decision making. CPI therefore used to deflate other economic series to calculate real inflation-free values. i.e. wages go up 10% but inflation is 15%, therefore real wages fallen by almost 5% less.
- Indexation – involves tying certain payments to rate of increase in CPI. E.g. pensions may be indexed. Similarly, savings may be index-linked, meaning interest rate is set equal to CPI, protecting real value of people’s savings. Many workers may also be covered by collective bargaining agreements that tie wage increases to CPI changes. Government may also index threshold at which people start to pay tax or higher tax rates to stop people paying more or less tax.