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. FES at Government Statistics
• 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
• 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 price increases are then multiplied by the weighting of the goods
• 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
• Costs of Inflation
  
• Inflation – definition