Every month the Office for National Statistics (ONS) collects 120,000 prices of goods and services from a wide range of retailers across the country - including online retailers.Prices are updated every month and price collectors visit the same retailers each time in order to monitor identical goods and make sure they are comparing like with like.All these prices are combined using information on average household spending patterns to produce an overall prices index.It also takes into account how much we spend on different items. So items are weighted - i.e. given more importance in the inflation indexes - according to how much we spend on them. We typically spend more on fuel than on postage stamps, for example.

So a large rise in the price of petrol and diesel would affect the overall rate of inflation more, as it has a weight of 4% in the RPI.

Meanwhile a rise in the price of stamps is less likely to affect the overall index, as they have a weighting of 0.1%

Measuring inflation

UK INFLATION

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Measures of inflation

In the UK there are two measures, the Retail Price Index (RPI) and the Consumer Price Index (CPI)

The major difference between the two is that the CPI does not include mortgage interest costs and tends to be more stable.

The Government chooses to use the CPI to base policy decisions upon.

Q. Identify aspects of government policy which the rate of inflation could affect

Knowledge and skills activity• In 2006, Bulgaria’s CPI rose by 4.8 per cent. In

2007, when the country’s inflation rate accelerated to 8.5 per cent, particular groups in the country were unhappy about it. For example, teachers went on strike, complaining about their 5 per cent pay rise, although the government was promising to give them a 30 per cent pay rise in 2008. Exporters were also not happy and the country experienced a trade in goods deficit of $9.1 billion in 2007.

1. What happened to teachers’ purchasing power in 2007? (L2)

2. What would determine teacher’s purchasing power in 2008? (L2-L3)

3. Explain why inflation may harm exporters (L3)