THE UK CONSUMER PRICE INDEX (CPI)

140
130
120
Index score (2015=100)

110
100
90
80
70
60
50
40
Jan 88Jul 90Jan 93Jul 95Jan 98Jul 00Jan 03Jul 05Jan 08Jul 10Jan 13Jul 15Jan 18Jul 20Jan 23

INFLATION TUTOR2U.NET/ECONOMICS
 CALCULATING INFLATION USING A PRICE INDEX

• A Consumer Price Index (CPI) is a measure that tracks changes in the

average price level of a basket of goods and services purchased by a
typical household over time.
• It is a widely used economic indicator for assessing inflation and cost
of living adjustments.
• CPI is calculated by comparing the current prices of the items in the
basket to the prices of the same items in a base year or period.
• The percentage change in this comparison reflects the inflation or
deflation rate.

INFLATION TUTOR2U.NET/ECONOMICS
 WHAT ARE WEIGHTS USED IN A PRICE INDEX?

The consumer price index is a weighted price index

These weights are based on the spending patterns of
households on a wide range of goods and services
In the UK, housing and household services account for 30% of
the inflation calculation
Food and non-alcoholic drink is now less than 10% of the index
The weights are altered periodically to take account of changing
spending patterns

INFLATION TUTOR2U.NET/ECONOMICS
 WEIGHTS USED IN UK CPIH (INC HOUSING COSTS)

Weight distribution for the CPIH in the UK 2020-2023 (%)

0% 5% 10% 15% 20% 25% 30% 35%
Housing, water, electricity, gas and other fuels 30%
Transport 11.5%
Restaurants and hotels 11.3%
Recreation and culture 11.1%
Food and non-alcoholic beverages 9.5%
Miscellaneous goods and services 6.8%
Furniture, household equipment and maintenance 5.6%
Clothing and footwear 4.9%
Alcoholic beverages and tobacco 3.4%
Education 2.2%
Communication 1.9%
Health 1.8%

INFLATION TUTOR2U.NET/ECONOMICS
 CALCULATING INFLATION USING A PRICE INDEX

Selection of the Basket of Goods and Services

Determination of the weights based on spending patterns

Price data collection including retail and online prices

Calculation of a price index using weights

INFLATION TUTOR2U.NET/ECONOMICS
 CALCULATING INFLATION USING A PRICE INDEX
2023 Price Index x
Item Weighting Price Index in 2022 Price Index in 2023
Weighting

Clothing and
250 100 105 26250
footwear
Transport 150 100 109 16350
Food and drinks 400 100 102 40800
Communication 200 100 93 18600

Calculating the consumer price index for 2023

1. Select prices in 2022 as the base year for the calculation, the index = 100
2. Multiply 2023 price index data for each category by their individual weighting
3. Sum of price x weights = 102,000
4. Then divide this number by the sum of the weights (1,000)
5. This gives a price index for 2023 of 102
6. The rate of inflation in 2023 in this example was therefore 2%

INFLATION TUTOR2U.NET/ECONOMICS
 LIMITATIONS OF THE UK CONSUMER PRICE INDEX

• The CPI basket is not fully representative of all consumers - it will be inaccurate for
non-typical households, for example - 10% of CPI index covers motoring costs –
inapplicable for non-car owners. Single people will spend differently from those with
children
• Errors / inaccuracies in data such as sampling errors from surveys.
• Many of the services in the digital economy do not have a price such as Google
searches, WhatsApp and Instagram feeds
• Changing quality of goods and services: a rise in the quality of products may not be
easily reflected in the prices we pay
• Time lags: The CPI is slow to respond to new products in markets – the CPI basket is
changed each year but only by a little.

INFLATION TUTOR2U.NET/ECONOMICS
 CHALLENGES IN MEASURING INFLATION (OVERVIEW)

• Basket of goods and services: Consumer preferences evolve over time, and the basket
may not always accurately reflect what people are buying.
• Substitution bias: Consumers tend to adjust their spending patterns in response to price
changes. When the price of a particular item rises significantly, people may switch to
cheaper alternatives.
• Quality adjustments: The CPI must make quality adjustments to account for quality
changes, which can be subjective and challenging to quantify accurately.
• Geographic variation: The CPI is typically a national measure and may not capture
regional variations in prices effectively.
• Subgroups and demographics: CPI represents an average consumer, and the inflation
experience can vary among groups, such as age, incomes, or urban vs. rural populations.

INFLATION TUTOR2U.NET/ECONOMICS
 If the CPI in 2020 was 150 and the CPI in 2021 was 160, what is the inflation
1 rate between 2020 and 2021?

A 5%

B 6.67%

C 10%

D 1.67%

INFLATION TUTOR2U.NET/ECONOMICS
 If the base year for the Consumer Price Index (CPI) is 2020 and the price of
2 a basket of goods and services in 2021 is $12,000, while the price of the
same basket in 2020 was $10,000, what is the CPI for 2021?

A 80

B 90

C 110

D 120

INFLATION TUTOR2U.NET/ECONOMICS
 If the CPI in 2019 was 120, the CPI in 2020 was 113, and the CPI in 2021
3 was 118, which year experienced price deflation?

A 2019

B 2020

C 2021

D Deflation did not occur in any of these years

INFLATION TUTOR2U.NET/ECONOMICS
 Weights are used to calculate the index of consumer prices to reflect the
4 different

A rate of change in price of each good over time.

amounts of money relative to their budget spent by consumers on each

B category of goods and services.

C levels of prices for each good.

D numbers of people buying each good.

INFLATION TUTOR2U.NET/ECONOMICS
 Suppose that a certain commodity was priced at $120 per tonne in January 2018 and by
5 December 2018 its price had risen to $135 per tonne. Using the January 2018 price as the
base, the value of the commodity’s index in December 2018 was:

A 112.5

B 113.3

C 115.0

D 135.0

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