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Prices, location and spread
Prices, location and spread

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5 The UK government price indices

‘The huge squeeze on Brits was laid bare today as figures showed inflation has soared to a 20-year high.’ (The Sun, 18 October 2011)

‘Overall, prices in the economy rose 0.6% on the month from August.’ (Guardian, 18 October 2011)

‘Inflation in the UK continued to fall in February, thanks largely to lower gas and electricity bills.’ (BBC News website, 20 March 2012)

‘UK inflation rises more than expected.’ (Daily Telegraph, 16 August 2011)

How often have you read or heard statements like these in the media? Have you ever wondered how ‘inflation’ is measured, or precisely what is meant by a statement such as ‘prices rose by 0.6%’? In Subsection 5.3, you will see that ‘rates of inflation’ are often calculated in the UK using an index of prices paid by consumers, the Consumer Prices Index (CPI), or another slightly different index, the Retail Prices Index (RPI). These indices may be used to calculate the percentage by which prices in general have risen over any given period, and (roughly speaking) this is what is meant by inflation. But what exactly do these price indices measure, and how are they calculated? These are the questions that are addressed in this section.