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

  1. Firstly, the government (through ONS) undertake the Family Expenditure Survey (FES). The FES is a voluntary survey of about 6,000 people. This finds out what % of income is spent on different goods. Basket of Goods at ONS.
  2. 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 The weighting reflects the relative importance of the good to people’s spending.

UK Basket of Goods

cpi-weights-2017
Main categories of weights – Source: ONS Consumer price inflation

source: ONS

  • The weighting of main sectors in the UK Basket of Goods.
  • Each section is then sub-divided into different groups – for example food – Rice, Bread e.t.c.

weights-food-cpi

  • 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.

Example of calculating inflation

calculating-inflation example

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