Q&As

Which inflation index should I refer to in a price variation clause?

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Published on LexisPSL on 18/06/2021

The following Commercial Q&A provides comprehensive and up to date legal information covering:

  • Which inflation index should I refer to in a price variation clause?
  • Retail Prices Index (RPI)
  • Consumer Prices Index (CPI)
  • Consumer Prices Index including owner-occupier’s housing costs (CPIH)
  • Harmonised index of consumer prices (HICP)
  • Other indices
  • Services Producer Price Index (SPPI)
  • Producer Price Indices (PPI)
  • Drafting considerations

Which inflation index should I refer to in a price variation clause?

A price variation clause in a contract is often included where the parties wish to cover inflation risk in respect of a price contained within the contract. Such clauses are also commonly used in cases where there are periodical payments such as financial remedy orders. A price variation clause will consist of the base price for the goods or services covered by the contract, the index to which the variation is linked, and an applicable date or period against which the index is applied to the base price. An index measures changes in average price levels and is therefore useful as a tool to keep the price paid under the contract at the same level relative to inflation. Most indices utilise a sample study of a list of typical items purchased by households, with weighting applied to reflect the importance of the type of good.

It is a matter of commercial negotiation which index is applied to a price variation clause. Inflation is measured by the Office for National Statistics (ONS) which produces three main indices:

  1. The Retail Prices Index (RPI)

  2. The Consumer Prices Index (CPI)

  3. The Consumer Prices Index including owner-occupier’s housing costs (CPIH)

Commercial drafters may come across any of these when reviewing or negotiating price variation clauses.

Retail Prices Index (RPI)

RPI was the

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