Tax And Price Index (TPI)

What Does Tax And Price Index Mean?

The tax and price index (TPI) is a measure of the percentage that a consumer's income must rise in order for them to maintain the same level of purchasing power. The tax and price index (TPI) takes into account changes in retail prices due to inflation, as well as changes to direct taxes that reduce a consumer's disposable income. This index is used in the United Kingdom.

Margaret Thatcher’s administration first introduced the TPI metric. This added TPI as a third way to measure taxpayers’ purchasing power and ability to maintain living standards, joining the Retail Prices Index (RPI) and RPI(X).

An index such as the TPI helps policymakers understand how much a person’s salary needs to rise for them to maintain their quality of life over time. 

Understanding the Tax And Price Index (TPI)

The tax and price index takes more factors into account than the Retail Prices Index. The RPI uses changes in retail prices only, whereas the TPI also takes into account other factors that affect disposable income, namely taxes. An increase in both direct taxes and the price of retail goods requires consumer's income to increase more than retail prices alone. If direct taxes, such as income taxes, decline while the price of retail goods increases, the RPI shows a greater increase than the TPI.

Metrics such as the TPI are important tools for shaping fiscal policy and labor regulations. Say the average salaried worker in a country earns $60,000 a year, and when they begin that job, that salary allows this worker to live comfortably and purchase a home. However, if this same employee continues to work at the same job at the same exact salary, that $60,000 will not go as far 20 years later. This is due to inflation and rising taxes.

The TPI Today

The TPI is published regularly by the Office for National Statistics. In January of 2017, the rate of inflation as measured by the index rose 3.1% over the previous 12 months. This number is relatively low, historically speaking. For example, the TPI reflected a 25.5 year-over-year change in January 1975, reflecting the need for incomes to rise 25.5% over the 12-month for a person to maintain the same purchasing power and quality of life.