What is inflation?
Inflation is a sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money
How is the rate of inflation measured?
Falling inflation does not mean falling prices!
How is the rate of inflation calculated?
Calculating a weighted price index
The following hypothetical example shows how to calculate a weighted price index.
|Category||Price Index||Weighting||Price x Weight|
|Alcohol & Tobacco||110||5||550|
Weights are attached to each category; we multiply these weights to the price index for each item of spending for a given year.
Limitations of the Consumer Price Index as a measure of inflation
Few households are average – the published figure for inflation is rarely the actual rate of inflation experienced by different people
New items added to the consumer price index in 2014
Items removed from the consumer price index in 2014