09- Explain how inflation is measured in the UK through indices such as Retail Prices Index(RPI) and the Consumer Prices Index( CPI) – (15 marks)
Inflation is the persistent increase in the level of prices while it can be measured in both the Retail Price Index and the Consumer Price Index. They are both different in slightly different ways in terms what the indices include as RPI also includes mortgages and council tax, and RPI is calculated differently compared to CPI. RPI is calculated arithmetically whereas it is just collecting the number of items that need to be calculated and then adding up, taking an average of them. While CPI is different as it is a geometric method. CPI can be calculated via the weighting method and this follows the concept of measuring the prices of a typical ‘basket’ of good and services. The data can be collected from the Family Expenditure Survey which representatives a monthly survey of household expenditure behaviour. E.g in 2008 fruit smoothies, USB, Muffins had got onto the CPI for the first time with also the removal of microwave ovens, 35 mm camera film and CD singles. The spending can be divided in 14 categories and each category is weighted to its importance for example 25% spending is household spending therefore it is weighted 25. So to find the overall weight it is by multiplying the price index to the weighting, added up together and divided by the overall weighting. So lets say the weighting is 104.1 increased from 100 he previous year. The rate of inflation is 4.1%. RPI can be worked out in the same way.