There are many different measures of inflation but all the main ones work in the same way. They attempt to measure changes in the cost of living for the average consumer using a weighted basket of goods.
A notional basket of goods is created and the cost of the goods and services in the basked calculated. The cost of those products s then calculated again at regular intervals and compared with the first price. The goods in the basket are weighted according to the proportion of income consumers spend on those items. This is important as it means a change in the price of petrol is taken into account more than a change in the price of matches, which are a very small part of most people’s budget. Different measures of inflation include different items and different weightings. All indexes are updated regularly to ensure the goods they contain are still bought and used by households
The price of this basket of goods is expressed as an index number, which has advantages and disadvantages:
But it
An index picks a base year and sets the price of the basket of goods in that year equal to 100. Every subsequent year is then compared to this base year. To calculate an index number:
There are no units for an index number.
For example
|
Year |
Price |
|
2014 |
£1,300 |
|
2015 |
£1,400 |
|
2016 |
£1,450 |
If the base year is 2014 then the index number for this year will be 100.
The index number for 2015 will be
Have a go at the index for 2016. The answer is at the bottom of the page.
To work out the inflation rate you need to calculate a percentage change. This is easy if you are comparing to the base year – just take off 100, but if you are comparing any two other years you need to use this formula
So to work out the inflation in 2014:
Have a go at inflation in 2015.
2016 index number is
Which gives an inflation rate of
