Economics Help

Measuring Inflation: Consumer Price Index (CPI)

The aim is to measure how consumers’ purchasing power is affected by rising prices

Household expenditure survey - This seeks to measure what people spend their money on. From finding out typical consumption patterns, the statistics body can create a typical basket of goods.
This basket of goods gives a relative importance to each different item. E.g. if petrol prices increased by 10% this would have a higher weighting than an increase in radios
The basket of goods is updated each year to take into account changes in expenditure
Every month changes in the prices of goods and services are monitored and combined into a single figure with using the weights in the basket of gods.

E.G. (1999 all price index is 100)

In the above example, we assume coal has a weighting of 40% and bread accounts for 10%