Following a decision by the central bank to raise the policy interest rate, mortgage interest payments for households on variable rates rise sharply, while the prices of other goods and services in the inflation basket remain constant. Which of the following correctly describes the direct, immediate impact of this change on the Consumer Prices Index (CPI) and the Retail Prices Index (RPI)?
Both CPI and RPI will increase, as housing costs are a major component of both baskets.
CPI will increase because it includes mortgage interest payments, whereas RPI will remain unchanged.
RPI will increase because it includes mortgage interest payments, whereas CPI will remain unchanged.
Neither index will change immediately because interest rate changes only affect inflation with a long time lag.
