Inflation, in the UK, is calculated through measuring changes in the cost of living. The official method is the CPI – Consumer Price Index. CPI Measures the annual % change in price level.
Steps for Calculating Inflation
- Firstly, the government (more specifically the Social Survey Division – Office for National Statistics) undertake the Family Expenditure Survey. FES. It is a voluntary survey of about 6,000. This finds out what % of income is spent on different goods. Basket of Goods at ONS
- This enables the government to create a typical basket of goods. From this a weighting is given to the different goods. e.g petrol may account for 8% of spending. Cigarettes 6% e.t.c
UK Basket of Goods
- The weighting of main sectors in UK Basket of Goods.
- E.g. transport has biggest weighting of 15.9%
- These sectors then have sub-divisions, e.g. for transport
- Then the government undertake a price survey. This means checking the prices of the 1,000 most common goods in the UK, every month. The % change in the price of individual goods and services are noted
- The price increases are then multiplied by the weighting of the goods. e.g. if petrol increases 10% and has a weighting of 1.3% in the basket it will be 10% * 0.013
- This means they can then calculate the price index. The index is a way of measuring % changes. A base year is chosen, which starts the price index.
- Difficulties in calculating inflation
- Different Measures of inflation
- Costs of Inflation
- Inflation – definition