8. Economic Performance - Inflation, Measures

Question 1

What are the two key measures of inflation?

Answer 1

RPI – old methodCPI – current method

Question 2

What’s the difference between RPI and CPI?

Answer 2

RPI also includes housing costs which CPI doesn’t.

Question 3

What are the seven key steps for calculating CPI? (consumer price index)

Answer 3

Carry out a family expenditure survey Form your basket of 650 goods and servicesWeight the different items in the basket according to the percentage of income spent on them Select the base yearGenerate index numbersMonthly collection of data and measure change annuallyChange the basket of goods/weights each year

Question 4

What are the problems with using CPI as a measure of inflation?

Answer 4

The basket may not be representative of all consumers in the economy.There maybe inaccuracies in the data/error in data collectionOther countries may use different measures making it hard to compareIt takes time for the basket to change and adjust to spending habits

Question 5

What is inflation?

Answer 5

A sustained increase in the general price levels.

Question 6

What is the targeted rate of inflation?

Answer 6

The UK aim for stable, low inflation of 2% but they’re allowed 1% leeway either way.