Inflation

Question 1

Define inflation

Answer 1

Sustained rise in the average price level

Question 2

Define inflation rate

Answer 2

Percentage change in the average price level over a period of time

Question 3

How is CPI calculated

Answer 3

7000 households asked to keep track of what they spend their money on
Top 650-700 items are selected for a basket
Each item is given a weight reflecting their share of total spending
Price data is collected every month for the items in the basket
Range of retail outlets in 180 different areas are used
An average price for all the items is then calculated

Question 4

What is the difference between the CPI and RPI

Answer 4

CPI excludes mortgage interest payments and other housing tax/costs (housing council)
So CPI tends to be lower than the RPI

Question 5

What are the limitations of using CPI

Answer 5

Changes in quality —> does not take into account changes in quality explaining price increases —> exaggerated inflation
Special offers —> discount prices at charity shops are not taken into account —> inflation overestimated
Statistical errors —> ONS selects 7000 households which may not represent the population so there will be a margin of error