Measuring Inflation

1
Measuring Inflation
Inflation is measured via the R.P.I. A
representative bundle of goods is used to
establish a typical spending pattern. Items are
weighted to reflect their relative importance
(e.g. a 5 increase in petrol prices will have a
larger impact on overall inflation, than a 5
increase in the price of matches). 100 is the
value of the base year. Prices of the same bundle
of goods are researched each month and then
expressed as a of the base year. E.g. Jan 1987
was a base year and the value in Jan 1992 was
136. This would show that prices had risen 36
over the 5-year period. Example Year Index
1 100 in year 1, CDs sold at 10 2
106 3 112 in year 3, CDs sold at
11 Q Has the price actually risen in real
terms? A In real terms the price of CDs in year
1 is After allowing for inflation we see that
in this case CDs are actually cheaper in year 3
than in year 1.
10 112 11.20 100