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Prices, location and spread
Prices, location and spread

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4 A simple chained price index

You have already seen that it is not a simple task to measure the price of even a single commodity at a fixed time and place. Measuring the change in price of a single commodity from one year to the next will be even more complicated but, as was said in Subsection 1.1, to answer our question it is necessary to measure the changes in the prices of the whole range of goods and services which people use. Moreover, since we wish to know how all the different changes in the prices of these goods and services affect people, we need to take into account those people’s consumption patterns. For example, a large increase in the price of high-quality caviar will not affect most people’s budgets since most households’ shopping lists do not include this commodity!

This makes the task of measuring price changes and examining how they affect us seem exceedingly difficult; but such a task is carried out in the UK regularly each month, organised by the Office for National Statistics. (Most of the prices are actually collected by a market research company under contract to the Office for National Statistics.) The results of their data collection and subsequent calculations are summarised in two measures called the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

These indices do not measure prices. (‘Indices’ is the plural of ‘index’.) Each is an index of price changes over time, and one or both of these indices are commonly used when people make comparisons about the cost of living. They are highly relevant measures for those engaged in wage bargaining.

The RPI and the CPI are both ‘chained’ in the sense that the index value for each year is linked to the year before. The very first link in the chain is called the base year and it is given an index value of 100.

Described image
Figure 35 A chained index