Measuring inflation

Measuring changes in average price levels requires the use of a device called an index.
It is impossible to keep an accurate record of every price change for every good and
service in the economy at all times. In 1914, the UK Government began to monitor food
prices to help protect workers during the First World War. In 1916, price checks on
clothing, fuel and a few other items were added to generate a simple cost of living
index.

(SOURCE: ONS).

Today, the UK uses a number of indices to track price changes, including the Consumer
Price Index (CPI), which was introduced in 2003, and the much older Retail Price Index
(RPI) which was introduced in 1947.  Using an index allows a general picture to develop
to show the average price change for a sample of goods and services, measured at
monthly intervals. In 2013 two new indices were introduced – the CPIH and the RPIJ. In
November 2016 the CPIH replaced the CPI as the ‘official’ measure of inflation in the
UK.

The CPI is based on the European Harmonised Index of Consumer Prices (HICP) and its
introduction in the UK allowed for more accurate inflation comparisons between the UK
and Europe.

Finding ‘average’ inflation

Inflation is a rise in the level of ‘average’ prices. However, there are hundreds of
thousands of goods and services,  and thousands of stores and outlets in an economy,
meaning that recording the price changes of all goods and services in all stores would
need an army of bureaucrats and would be highly inefficient. To solve this problem
statisticians look at samples of products and outlets to create a general index of
inflation. To be of use, the measurement of inflation must be representative of what
typical households spend.