Measuring Inflation

Inflation means a sustained increase in the average or general price level in an economy. This means that the price level of the vast majority of the goods keeps on rising.

In O level tutorials, we have looked at the causes of inflation. Now we will look at how inflation is measured and what is the importance of measuring inflation.

Price of goods and services determines how much we have to spend in order to live. The cost of living will increase and the standard of living could go down if there is too much inflation. Therefore, measuring inflation also means we are measuring the increases in cost of living.

In the UK there are two measures, the Retail Price Index (RPI) and the Consumer Price Index (CPI)

Price data is used in many ways by the government, businesses, and society in general. They can affect interest rates, tax allowances, wages, state benefits, pensions, maintenance payments and many other ‘index-linked’ contracts.

The consumer price index (CPI) is a weighted price index, which measures the monthly change in the prices of over 600 different goods and services

The weights are revised each year, using information from the Family Expenditure Survey. The expenditure of the highest income households, and of pensioner households dependent on state pensions, is excluded.

At the time of writing, the inflation target is 2% +/- 1% CPI.

The CPI is a thorough indicator of consumer price inflation for the British economy but there are some weaknesses in its usefulness for some groups of people. This has become an important issue both when CPI inflation has been well above target.

The CPI is not fully representative: Since the CPI represents the expenditure of the ‘average’ household, it will be inaccurate for the ‘non-typical’ household, for example, and 14% of the index is devoted to motoring expenses – inapplicable for non-car owners. We all have our own ‘weighting’ for goods and services that does not coincide with that assigned for the consumer price index.

Housing costs: The ‘housing’ category of the CPI records changes in the costs of rents, property and insurance, repairs and accounts for around 16% of the index. Housing costs vary from person to person, from the young house buyer, to the older householder who may have paid off the mortgage.

Changing quality of goods and services: Although the price of a good or service may rise, this may be accompanied by an improvement in quality. It is hard to make price comparisons of electrical goods because new AV equipment is so different from its predecessors. In this respect, the CPI may over-estimate inflation. The CPI is slow to respond to the emergence of new products and services.
One of the big issues in recent times has been the difference in measured inflation between the Consumer Price Index (CPI) and the Retail Price Index (RPI). The latter includes mortgage interest costs in its calculation and is therefore more sensitive to changes in the cost of mortgage borrowing.

inflation rate in UK

Inflation rate in Maldives

The inflation rate in Maldives was recorded at 4.80 percent in February of 2013. Inflation Rate in Maldives is reported by the Maldives Monetary Authority.


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