Preview

MEASUREMENT,CAUSES AND CONSEQUENCES OF INFLATION

Better Essays
Open Document
Open Document
1505 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
MEASUREMENT,CAUSES AND CONSEQUENCES OF INFLATION
Inflation : measurement , causes and consequences

Measuring Inflation

The main measure of inflation is the consumer prices index (CPI) : a measure of changes in the price representative basket of consumer goods and services . Differs from retail prices index (RPI) in methodology and coverage.
- It forms the basis for the inflation target that the government requires the Bank of England's Monetary Policy Committee to achieve.
- It is also the main measure used in the rest of the European Union , where it is often referred to as the harmonised index of consumer prices (HICP).
CPI and most other measures of inflation are weighted price indices.
There are various stages in constructing a weighted price index:
1. Select a base year (standard year in which nothing unusual happened ).
2.The variable being measured is given a value of 100 in the base year and other years are compared to it.
3. Statisticians carry out the Family Expenditure Survey to see what people spend there money on ( in UK employed by ONS), involves sampling more than 6000 households.
4. From info gathered the statisticians decide which items to include in the price index. (a "shopping basket is created"), this is representative of around 650 goods and services.
5. These products have weights attached to them. The weights represent the proportion spent on the different items. e.g.) If it found that 10% of peoples expenditure goes on food , this will be given a weighting of 10/100 or 1/10.
6. Then one must find out whether the items have changed in price. (officials visit a range of outlets throughout the country each month)

The CPI and other Measures of Inflation

Another measure of inflation in the UK is the retail price index : measure of inflation that is used for adjusting pensions and other benefits to take account of changes in inflation and frequently used in wage negotiations. Differs from the consumer price index in methodology and coverage.

- Has been used for the

You May Also Find These Documents Helpful

  • Powerful Essays

    The consumer pricing index (CPI) is a measure of the price level of consumer goods and services. The U.S. Bureau of Labor Statistics began calculating and issuing the monthly calculation in 1919. The CPI is calculated by observing price changes among a wide range of products and weighing these price changes by the share of income consumers spend to purchase them. The CPI focuses on approximating a cost of living index and can be used to evaluate our currency and prices. CPI is defined as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services” (Federal Reserve Bank, 2010). The consumer pricing index can be used for three things “(1) as a Cost of Living Index (COLI); i.e., as a measure of the relative cost of achieving the standard of living when facing two different sets of prices for the same group of commodities; (2) as a consumption deflator; i.e., the price change component for a decomposition of a value ratio into price and quantity components and (3) as a measure of general inflation” (Federal Reserve Bank, 2010).…

    • 4009 Words
    • 17 Pages
    Powerful Essays
  • Powerful Essays

    Economic Forecast Paper

    • 1557 Words
    • 7 Pages

    Inflation can be defined as the overall general upward price movement of goods and services in an economy (BLS, 2007). It is a continual rise in price levels and, subsequently, purchasing power is falling. The Consumer Price Index (CPI) measures inflation as experienced by consumers in their day-to-day living expenses and is separated into two groups or populations of consumers: The CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W).…

    • 1557 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    Nt1310 Unit 2 Case Study

    • 824 Words
    • 4 Pages

    The CPI is meant to be a measure of the cost of living in the United States at any given time. It is used to track inflation. The CPI is derived from the cost of a given “market basket” of products and services that people typically need to buy. In other words, a set of goods and services is made up and the prices of those goods and services are determined. This is used as a baseline. As the prices of those goods and services changes, so does the CPI.…

    • 824 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Tesco in China

    • 1492 Words
    • 6 Pages

    It is measured by the consumer price index. A rise in inflation rate means consumers will think carefully before spending. As it is a setback for both consumer and business, as businesses will have to pay out more money due to employees, suppliers etc. demanding more money to keep going and pay for essential daily needs.…

    • 1492 Words
    • 6 Pages
    Good Essays
  • Powerful Essays

    The Consumer Price Index measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer. Economists use the Consumer Price Index when prices change to measure the cost of living. They will compare the price certain goods from one year to another, measuring the change in price to determine how much money you would need to uphold your previous standard of living.…

    • 1161 Words
    • 5 Pages
    Powerful Essays
  • Good Essays

    Macro Unit 2 Lesson 1

    • 3639 Words
    • 15 Pages

    around 300 Goods and services. Measures the prices of goods and services purchased by wage earners.…

    • 3639 Words
    • 15 Pages
    Good Essays
  • Satisfactory Essays

    Inflation can be caused by an increase in aggregate demand, Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by the formula: Aggregate Demand (AD) = C + I + G + (X-M). An increase in aggregate demand can be caused by many factors such as a decrease in income tax which in turn increase the amount of disposable income people have, which therefore increase consumer spending, higher wages would have the same effect of increasing consumer spending. Also if there were low interest rates then consumers would be less likely to save and more likely to spend which again would increase consumer spending. An increase in the budget deficit would increase government spending which would again increase AD, as well as this if there is a ‘depreciation of the pound sterling’ then there would be an increase in export as there would be cheaper, however there would be a decrease in imports as they would be more expensive therefore increase AD.…

    • 715 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    One reason why the CPI measure of inflation was above its target was because of rising import prices such as oil or commodity goods. This is shown in the first article given from The Guardian News and Media. If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation / depreciation means the Pound is worth less, therefore we have to pay more to buy the same imported goods. In 2011 there was a decrease in the pounds value up against the euro which is what could’ve caused this. This is called cost-push inflation.…

    • 715 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    Macroeconomic Forecast

    • 1802 Words
    • 8 Pages

    Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS), is the main measure of inflation in the United States. The index is used by the government to report monthly and annual inflation rates as well as to adjust Social Security benefits and income tax brackets. (McConnell & Brue, p. 141)…

    • 1802 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    c) The Consumer Price Index (CPI) is the official measure of inflation in the United…

    • 778 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Consumer Price Index

    • 296 Words
    • 2 Pages

    CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.…

    • 296 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Consumer Price Index

    • 1015 Words
    • 5 Pages

    The Consumer Price Index (CPI) is a measure of change in prices over a period of time. The CPI is made up of a fixed basket of goods that is used to determine one’s CPI. The basket of goods consists of services and goods like food, education, transportation, apparel, housing, and beverages. Some examples of these goods are cereal, milk, cheese, prescription drugs, jewelry and new vehicles (“Consumer Price Index” 2010). The basket of goods are reviewed every ten years, which is a major downside to the CPI because it doesn’t keep the system up-to-date. Another major downside to the CPI is it only takes in account people from urban areas and does not accurately reflect the people living in rural areas. This is a downside because 65-75% of our population lives on the coastline. A major use of the CPI is adjusting the dollar value. “The CPI is often used to adjust consumers' income payments (for example, Social Security) to adjust income eligibility levels for government assistance and to automatically provide cost-of-living wage adjustments to millions of American workers” (“Consumer Price Index” 2010). Another use of the Consumer Price Index is it acts as a deflator of other economic series. Examples of these series adjusted include retail sales and hourly/weekly earnings (“Consumer Price Index” 2010). The CPI shows the rate of inflation and deflation over a certain period of time. In order to calculate deflation or inflation you need to first calculate the CPI for your starting and ending dates. To calculate the CPI you take the basket of goods for the current year divided by the basket of goods for the base year then times that by one hundred.…

    • 1015 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Inflation in Mauritius

    • 815 Words
    • 4 Pages

    Inflation is the overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.…

    • 815 Words
    • 4 Pages
    Powerful Essays
  • Satisfactory Essays

    Homework Macroeconomics

    • 403 Words
    • 2 Pages

    Consumer Price Index (CPI) measures the price of a fixed basket of goods and service purchased by a typical consumer relative to the same basket in a base year.…

    • 403 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Inflation in India is measured through a WPI ( wholesale price index ) . In India, the wholesale price index (WPI), rate consisted of three main components - primary articles, which included food articles, constituting 22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index…

    • 1365 Words
    • 6 Pages
    Better Essays

Related Topics