Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tax and Price Index (TPI)

What it is:

Used primarily in the United Kingdom, a tax and price index measures the amount that a consumer’s income would have to increase to compensate for increases in inflation and taxes.

How it works (Example):

Assume John Doe has $50,000 in disposable income this year. Next year, inflation increases by 2% and Doe’s taxes increase by 5%, which dramatically decrease the purchasing power of John’s $50,000. To keep up, his $50,000 would need to increase by 7%. Similarly, the tax and price index measures, in more sophisticated and accurate terms, how much consumer incomes would need to increase in order to have the same purchasing power. Because the measure is an index, its calculations are relative to a historical year.

Why it Matters:

The tax and price index is a measure of consumer purchasing power. It is in some ways an enhancement to the consumer price index because it accounts for the additional burden of tax increases.