The Affordability of tobacco index, as seen in table 3.1 of this publication, gives a measure of the relative affordability of tobacco, by comparing the relative changes in the price of tobacco, with changes in households’ disposable income per capita over the same period (with both allowing for inflation).
The Tobacco Price Index (TPI) shows how much the average price of tobacco has changed compared with the base price (1987).
The Retail Prices Index (RPI) shows by how much the prices of all items have changed compared with the base price (1987).
Both the above indices are produced by ONS.
From this information, we calculate the Relative Tobacco Price Index (RTPI) as follows:
rtpi = (tpi/rpi)*100
tpi = tobacco price index
rpi = retail prices index
This shows how the average price of tobacco has changed since the base year (1987) compared with prices of all other items. A value greater than 100 shows that the price of tobacco has increased by more than inflation, during that period.
The Real Households’ Disposable Income Index (RHDI) is an index of total households’ income, minus payments of income tax and other taxes, social contributions and other current transfers, converted to real terms (i.e. after dividing by a general price index to remove the effect of inflation), which tracks, exclusively, changes in real disposable income. It is produced by ONS.
The adjusted RHDI (ARHDI) used in the affordability of tobacco calculation is calculated by dividing the RHDI index by total number of UK adults (aged 18 and over) to give a per capita measure. Revisions to original population estimates published by ONS are applied to the time series when applicable. As population estimates for the most recent year of data do not become available until after publication, the most recent year of estimates available are used for the most recent year of the adjusted RHDI.
The RHDI is based on an annual total (sum of 4 quarters), with the index base year set as 1987, which is therefore equal to 100. This differs from the TPI and RPI for which the index base represents data as at a particular month (January 1987). The annual values reported for these indices are a mean of 12 monthly index values. Therefore in these cases, the index value for 1987 will not necessarily equal 100.
The Affordability of tobacco index is then calculated as follows:
at = (arhdi/ rtpi)*100
at = affordability of tobacco index
arhdi = adjusted real households’ disposable income index
rtpi = relative tobacco price index
If the affordability index is above 100, then tobacco is relatively more affordable than January 1987.
More information on the creation of indices used in this calculation can be found on the ONS website.