inflation

• What is inflation?

  Persistent increase of prices in an economy
• What does measuring inflation indicate?

  How quickly prices are rising in the economy
• What is disinflation?

  Positive inflation rate lower than the previous year
• What is deflation?

  When prices are actually falling in the economy
• How do countries measure inflation?

  By constructing a Consumer Price Index (CPI)
• What does the CPI tell us?

  About rises in prices of goods and services
• What is the process of carrying out a Consumer Price Index (CPI)?

  1. Conduct a family expenditure survey
  2. Collect data on purchases and prices
  3. Form a consumer basket of popular goods
  4. Weight goods based on income percentage
  5. Calculate total weighted price of the basket
• How many goods and services are typically in the UK CPI basket?

  Approximately 700 different goods and services
• Why are weights important in the CPI?

  They reflect the percentage of income spent
• What is the base year index number?

  Always 100 in the base year
• How do you convert a year’s total weighted price into index form?

  Divide by base year price and multiply by 100
• How is the annual inflation rate calculated?

  Percentage change between index numbers
• What are the issues with CPI inflation rates?

  • Personal inflation rates differ
  • Price fluctuations distort overall CPI
  • Housing costs are excluded
  • Basket updates may be too slow
• Why might personal inflation rates differ?

  Not everyone buys all goods in the basket
• What goods are subject to significant price fluctuations?

  Food and energy goods like gas and electricity
• What does the core CPI exclude?

  Items with significant price fluctuations
• What does the PPI measure?

  Increases in prices of goods leaving factories
• What is the CPI H?

  CPI including housing costs in the basket
• Why might the CPI basket updates be considered slow?

  They occur only once a year
• What is the relationship between CPI and personal consumption habits?

  CPI may not reflect current consumption habits