Unit 2 - Personal Finance : Inflation

Question 1

Whats inflation?

Answer 1

the rate at which prices are rising - if the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%.

Question 2

Consumer Price Index (CPI)

Answer 2

Measures how quickly the pound loses value (important indicator of how a counties economy is performing).
Excludes investments, life insurance, real estate and items that don’t relate to consumers day to day consumption
Measures price % change over a base year when the index was set at 100.

Question 3

Retail Price Index (RPI)

Answer 3

Measures inflation using a different “basket of good” and calculating the % change over 12 months.
Includes housing costs such as mortgage rates and council tax where CPI doesn’t.
RPI is generally always higher than the CPI.

Question 4

Index number

Answer 4

Like percentages which describe changes in costs or prices from year to year.
Costs/ prices compared with a base year (100).

Index number = (cost in year n / cost in base year) x 100

Index number more than 100 → the price in year n is higher than the base year
Index number less than 100 → the price in year n is lower than the base year