Association of Chartered Certified Accountants (ACCA) Certification Practice Test

RPIY provides a measure of which inflation rate?

1. Total inflation including all household costs

2. Underlying rate minus mortgage interest and certain taxes

3. Pure inflation without any exclusions

4. Inflation solely based on consumer spending

The correct answer is: Underlying rate minus mortgage interest and certain taxes

The Retail Price Index (RPI) which is used to calculate the RPIY (Retail Price Index excluding Mortgage interest and certain taxes) provides a measure of the underlying inflation rate while omitting the effects of mortgage interest payments and certain taxes. This adjustment allows for a clearer picture of the inflation that households face in their essential expenses. Mortgage interest can significantly distort the overall inflation measure because it is heavily influenced by interest rate changes, which may not reflect the immediate spending behaviors of households nor the true cost of living, particularly in contexts where housing markets fluctuate. By excluding these components, RPIY offers a more stable indicator, closely aligned with consumer price movements that affect household budgets directly. This focus on underlying inflation, rather than total inflation or pure inflation, provides policymakers and analysts with a more consistent metric for assessing economic conditions. Ultimately, RPIY provides insight into how inflation impacts everyday expenses while filtering out elements that could lead to volatility in the measurement.