How is Inflation Calculated?

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

uk basket
source: ONS

  • 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.

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