Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
B) Interpret price indices (RPI and CPI) and the rate of inflation
Full specification wording
Inflation: b) Interpret price indices (RPI and CPI) and the rate of inflation
Price indices like the Consumer Prices Index (CPI) and Retail Prices Index (RPI) measure changes in the general price level to calculate the inflation rate.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 2 of 6
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Price indices like the Consumer Prices Index (CPI) and Retail Prices Index (RPI) measure changes in the general price level to calculate the inflation rate. Both use a weighted basket of goods reflecting typical household spending. The CPI is the UK's official measure for its inflation target, excluding housing costs like mortgage interest payments. The RPI includes these housing costs, typically resulting in a higher rate than CPI. To interpret these indices, economists look at the index number; a rise from a base of 100 to 105 indicates 5% inflation. The rate of inflation is the percentage change in the index over a year. Understanding how to read these indices is vital for evaluating changes in the cost of living and real incomes.
What earns the marks
- Identify CPI as the official measure of inflation that excludes mortgage interest payments and council tax.
- Identify RPI as an alternative measure that includes housing costs and is often used for wage negotiations.
- Calculate the rate of inflation by finding the percentage change in the price index between two periods.
- Interpret index numbers to determine the relative cost of a basket of goods compared to the base year.
Common mistakes and how to put them right
Confusing the index number with the inflation rate.
Put it right: The index number represents the price level relative to a base year (e.g. 120), while the inflation rate is the percentage change in that index (e.g. 5%).
Assuming CPI and RPI measure exactly the same items.
Put it right: RPI includes housing costs such as mortgage interest payments, whereas CPI does not.
Calculating the inflation rate by subtracting index points instead of calculating the percentage change.
Put it right: Use the formula ((New Index - Old Index) / Old Index) x 100 to find the inflation rate.
Exam tips
- When given a table of index numbers, remember that the base year is always represented by an index of 100.
- Pay close attention to whether a question asks for the price index value or the percentage rate of inflation.
- Be prepared to explain why RPI is generally higher than CPI due to the inclusion of housing costs.
Try the lesson
The start of the Inflation: b) Interpret price indices (RPI and CPI) and the rate of inflation lesson, made from checked teaching notes for this specification point.
Have a go first
The Consumer Prices Index (CPI) for a country was recorded at 120.0 in 2022 and 126.0 in 2023. Based on these index numbers, what was the annual rate of inflation for the year 2023?
Listen
Price indices like the Consumer Prices Index (CPI) and Retail Prices Index (RPI) measure changes in the general price level to calculate the inflation rate. Both use a weighted basket of goods reflecting typical household spending. The CPI is the UK's official measure for its inflation target, excluding housing costs like mortgage interest payments. The RPI includes these housing costs, typically resulting in a higher rate than CPI. To interpret these indices, economists look at the index number; a rise from a base of 100 to 105 indicates 5% inflation. The rate of inflation is the percentage change in the index over a year. Understanding how to read these indices is vital for evaluating changes in the cost of living and real incomes. A strong answer earns marks for these points. Identify CPI as the official measure of inflation that excludes mortgage interest payments and council tax. Identify RPI as an alternative measure that includes housing costs and is often used for wage negotiations. Calculate the rate of inflation by finding the percentage change in the price index between two periods. Interpret index numbers to determine the relative cost of a basket of goods compared to the base year. A common slip: Confusing the index number with the inflation rate. Instead, The index number represents the price level relative to a base year (e.g. 120), while the inflation rate is the percentage change in that index (e.g. 5%). Exam tip: When given a table of index numbers, remember that the base year is always represented by an index of 100.
Key words
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Price indices
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CPI
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RPI
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Rate of inflation
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See every definition
- Price indices
- Measures such as the CPI and RPI that measure changes in the general price level using a weighted basket of goods reflecting typical household spending.
- CPI
- The UK's official measure for its inflation target, excluding housing costs like mortgage interest payments.
- RPI
- An alternative measure that includes housing costs, typically resulting in a higher rate than CPI.
- Rate of inflation
- The percentage change in the index over a year, found by calculating the percentage change in the price index between two periods.
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