Inflation — Edexcel A-Level Economics A
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Inflation explained
The UK inflation rate is calculated by the Office for National Statistics (ONS) using the Consumer Prices Index (CPI).
Read the full explanation
The ONS first selects a representative basket of goods and services, based on household spending patterns from the Living Costs and Food Survey. Each item is given a weight reflecting its share of total household expenditure. Prices are collected monthly from a range of outlets across the UK. The ONS then calculates a price index for each item, typically using a base year where the index equals 100. The weighted average of these item indices gives the overall CPI index. The inflation rate is the percentage change in the CPI index from one period to the same period a year earlier. For example, if the CPI index rises from 100 to 102 over twelve months, the inflation rate is 2%. This process ensures the CPI reflects changes in the cost of living for an average UK household.
Your focus
- Describe the steps involved in calculating the UK inflation rate using the CPI.
- Explain the role of weights and the basket of goods in the CPI calculation.
- Calculate the inflation rate given CPI index values for two periods.
Inflation exam tips
Marking Points
- The ONS selects a representative basket of goods and services based on household spending patterns.
- Weights are assigned to each item according to its share of total household expenditure.
- Prices are collected monthly from various outlets across the UK.
- A price index is calculated for each item, often with a base year set to 100.
- The overall CPI is a weighted average of individual item indices.
- The inflation rate is the percentage change in the CPI index over twelve months.
Examiner Tips
- 💡Learn the steps in order: basket selection, weighting, price collection, index calculation, weighted average, percentage change.
- 💡Use the formula: inflation rate = ((CPI in current year - CPI in previous year) / CPI in previous year) × 100.
- 💡Remember that the base year index is set to 100, and subsequent indices are relative to that base.
- 💡Practice interpreting data: if CPI rises from 105 to 108, the inflation rate is approximately 2.86%.
Common Mistakes
- Confusing the CPI with the Retail Prices Index (RPI); the CPI excludes certain housing costs such as mortgage interest payments, while RPI includes them.
- Assuming the inflation rate is the change in the price level rather than the percentage change in the index; the rate is expressed as a percentage.
- Thinking that the basket of goods is fixed permanently; the ONS updates the basket annually to reflect changing spending patterns.
- Believing that the CPI measures the price level of all goods and services; it measures the average change in prices of a representative basket.