4.3.1 Measurement of Inflation

• What does the GDP Deflator measure?

  Changes in overall economic output prices
• Inflation always reduces the purchasing power of money.


  True
• The Consumer Price Index (CPI) is the most widely used measure of inflation
• What is inflation?

  General increase in prices
• If a loaf of bread costs £1 today and £1.10 next year, the inflation rate is 10%
• What is inflation?

  General increase in prices
• Inflation reduces the purchasing power
• What is the inflation rate if a loaf of bread increases from £1 to £1.10?

  10%
• What does the Consumer Price Index (CPI) track?

  Changes in consumer prices
• The CPI reflects the inflation rate in an economy.


  True
• What is the first step in calculating the CPI?

  Select a representative basket
• CPI is used to adjust wages, salaries, and benefits to maintain purchasing power.
• What does the basket of goods and services in CPI exclude?

  Housing costs
• The PPI tracks prices at the producer level.

  True
• What is included in the RPI basket that is excluded in the CPI basket?

  Housing costs
• CPI is the primary official measure of inflation used by policymakers.
• The CPI tracks changes in prices of a basket of consumer goods and services.


  True
• Steps to calculate the CPI

  1️⃣ Select a representative basket

  2️⃣ Assign weights to items

  3️⃣ Track prices over time

  4️⃣ Calculate the inflation rate
• What does the basket of goods and services represent?

  Typical household spending
• Match the category with its approximate percentage of the CPI basket:

  Food and Non-Alcoholic Beverages ↔️ 15%

  Housing, Water, Electricity, Gas, and Other Fuels ↔️ 20%

  Transport ↔️ 12%

  Recreation and Culture ↔️ 8%
• Each category in the basket is assigned a weight based on its share of household spending.


  True
• The weighting system in CPI ensures that the index accurately represents the impact of price changes on typical consumer expenses.
• CPI excludes housing costs, whereas RPI includes them for a broader perspective.


  True
• Match the inflation measure with its characteristics:

  CPI ↔️ Excludes housing costs

  RPI ↔️ Includes housing costs
• CPI and RPI use identical baskets of goods and services.

  False
• Weights are assigned to items in the CPI basket based on their share of household spending
• RPI is still used for indexing wages, pensions, and some payments
• What is the Consumer Price Index (CPI) used to measure?

  Inflation
• What is included in the basket of goods and services tracked by the Retail Price Index (RPI)?

  Housing costs
• Steps in calculating the Consumer Price Index (CPI)

  1️⃣ Select a representative basket of goods and services

  2️⃣ Assign weights to each item based on household spending

  3️⃣ Track prices of the basket items over time

  4️⃣ Calculate the inflation rate
• What is the purpose of the basket of goods and services used in calculating the CPI?

  To track inflation rates
• Each category in the CPI basket is assigned a weight based on its share of household spending.

  True
• Steps to determine weights in CPI calculation:

  1️⃣ Conduct household expenditure surveys

  2️⃣ Calculate expenditure percentages

  3️⃣ Assign weights reflecting expenditure shares
• The CPI excludes housing costs, while the RPI includes them.


  True
• Match the measure with its characteristic:

  CPI ↔️ Excludes housing costs

  RPI ↔️ Includes housing costs
• Why is the RPI considered less reliable than the CPI as a measure of inflation?

  Broader basket
• The first step in calculating CPI is selecting a representative basket of goods and services
• Steps in calculating the Consumer Price Index (CPI)

  1️⃣ Select a representative basket of goods and services

  2️⃣ Assign weights based on household spending

  3️⃣ Track prices of items over time

  4️⃣ Calculate the overall change in prices
• CPI is used to adjust wages and salaries to maintain purchasing power.

  True
• Central banks use CPI to set monetary policy