Inflation is the term used to describe the increase in the cost of goods and services. It is determined by the rate at which those prices are changing. Although prices usually rise over time, deflation is also a possibility.
Significance of Inflation measure
A recognized metric is the Consumer Price Index (CPI). It measures where the economy is heading, and how consumers are doing day-to-day. In addition to that, it is because of CPI that the bank spends so much time to keep it stable. Here are four ways to measure it:
Different Measures of Inflation
- Consumer Price Index (CPI) – is an official measure. The most well-known indicator of inflation is the Consumer Price Index (CPI), which determines the percentage change in the price of a variety of goods and services that households typically use.
Based on the EU HCIP (Harmonised Consumer Index Prices). It includes and excludes various items.
- Includes taxes.
- Excludes mortgage interest payments and housing costs
- Includes some financial services not included in RPI
The CPI is constructed each month using 80,000 items in a fixed basket of goods and services representing what consumers buy in their everyday lives—from gasoline at the pump and apples at the grocery store to cable TV fees and doctor visits.
- CPIH – Another indicator of inflation is the CPIH. In addition to being based on CPI, it also includes housing expenses like mortgage interest payments. Costs incurred by owner-occupants (OOH) make up 12% of the CPIH weighting. The largest portion of OOH is made up of mortgage interest payments. 10%, on average, of household expenses, go toward mortgage interest.
- CPIY – The CPI – Indirect taxes.
The impact of indirect taxes like VAT and excise duty is not included in this CPI measure. It is helpful for figuring out the true rate of inflation while ignoring tax increases, which last for a year. For instance, the VAT increase in 2011 increased CPI, but CPI-Y remained significantly lower.
4. Retail Price Index (RPI) – RPI was previously the recognized indicator of inflation. Additional elements are also included, including housing costs not included in the CPI, like Council tax and mortgage interest payments. RPI is typically more erratic than CPI. The RPI is affected by changes in interest rates, but not the CPI. As a recognized national statistic, RPI is no longer used. RPIJ, which is similar to RPI but is calculated using geometric means, has replaced it.
