Retail Price Index

The retail price index measures the change of average prices over a  certain amount of time. The measurements are made by recording the essential goods and services people are expected to buy, putting them into an imaginary shopping basket called the "Basket of Goods".  

 A price index is shown as a single number which indicates the price change in a number of different goods. This is calculated by comparing the price of goods to the base year.

Inflation

 Inflation is the rise in the prices of goods and services in an economy over a period of time. When the general price level rises, goods and services become more expensive. A chief measure of price inflation is called the inflation rate, it is the annualized percentage change of general price index over a period of time.

 Inflation's effects on an economy can be both positive and negative. One of the negative effects of inflation include a decrease in the real value of money. Furthermore, inflation also discourages saving and investments. On the other hand, some positive effects include encouraging investment in non-monetary capital projects and ensuring central banks can adjust nominal interest rates.

Calculating Inflation Rate


 You can use the Inflation Calculator to calculate the inflation rate. It uses a price index to show you how the cost of goods and services has changed over time.

 For example,  you want to know what goods and services costing £23.60 in 1990 would have cost in 1997.

The price index for 1990 = 134.8

The price index for 1997 = 373.2

The Calculator increases the cost in 1990 by the change in prices between 1990 and 1997 with this formula:

Cost in 1997 = Cost in 1990 x ( 1997 price index / 1990 price index )

£65.33 = £23.60 x ( 373.2 / 134.8 )

Therefore, the future cost in 1997 of the same goods and services has risen to £65.33.

The Disadvantages of Using a Price Index 

 The price index is used to show inflation rates and how it effects customers. however there are still some disadvantages:

 - The index does not 100% accurately show how price changes affect typical customers. 

- The index compares the prices of the current year to the base year. However, if the results of the base year is especially low or high, the price index won't be as accurate. 

- Some items are subjected to a lot of other variations: E.g. Food & Fuel