What is inflation and how is it calculated?

Inflation is the rise in prices in a country such as United Kingdom. What we most often call inflation are the Consumer Price Index (CPI) or Harmonised Index of Consumer Prices (HICP), a basket of goods trying to measure the price movements of goods and services in private consumption. Every year, the basket of good are reviewed. Some new items may be added and some are removed – just to reflect the consumer spending patterns.

The British CPI index follow price movements of a basket to be equal to what an average Brit consume. The weight of each product in the basket, ie: the components included in Consumer Price Index, is set out below:

Item CPI weight

(per cent)

 Price Variation

(since 2008)

 Amount of items
1 Food & non-alcoholic beverages 11.8 High 22
2 Alcohol & tobacco 4.4 Low 4
3 Clothing & footwear 5.7 Medium 11
4 Housing & household services 12.6 Medium 5
5 Furniture & household goods 6.6 Medium 11
6 Health 2.2 Low 3
7 Transport 15.1 High 6
8 Communication 2.3 Low 1
9 Recreation & culture 14.5 High 17
10 Education 2.1 Low 1
11 Restaurants & hotels 12.8 Low 8
12 Miscellaneous 9.9 High 11

In UK, Consumer Price Index are presented by Office for National Statistics once every month.

The statistics calculated by collecting price information from several outlets around the country. It is important to note that the CPI is about what private citizens pay and therefore also affected the sales tax, indirect taxes and subsidies.

Sometimes it feels a bit irrelevant to compare countries, because each country’s inflation and consumption basket is composed of different products and each product has different weight in each country’s CPI.

Some countries do not do yearly revisions to the importance of each product and the products in the basket, leading to the shopping cart does not really reflect the actual inflation because the CPI-ROM does not capture the current consumption and hence the price level.

There are also some countries excluding important product groups from the CPI. One example are the United States CPI, excluding food and energy from the because of its volatility.

Interesting articles about inflation

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Article written by Markus Jalmerot, with assistance of Athanasios Karagiannis.

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