Inflation

What is Inflation?

Inflation is the rate of change of prices for goods and services.

There are a number of different measures of inflation in use. The most frequently quoted and most significant ones are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

One of the key differences between the two main indexes is that RPI includes housing costs such as mortgage interest payments and council tax, whereas CPI does not.

If inflation was at 3% we would need to spend 3% more to buy the same things we bought 12 months ago.

So how do we get these numbers?

Monthly one of the governmental agencies, called the Office for National Statistics collects as many prices of goods from a range of retailers, both online and offline.

The same goods are used in order to see a difference in the prices. For example, if a box of "Tesco Value Cornflakes" was counted, it would be invalid to use "Marks and Spencers Cornflakes" in a comparrison, instead it would have to be the same sized box of "Tesco Value Cornflakes".

Then they take all of this data and combine it with some more data they collect on what we buy. For example, taking the cereal approach again we buy 1 box of cereal a week, but we may need to buy milk 4 times a week (That would be a lot of milk!).

So, if the price of Milk went up by 10p and so did the box of "Tesco Value Cornflakes", the price of milk would have a bigger inpact than the cornflakes.

We then call this magical figure the CPI or RPI depending on what data we are including!

Sources (correct as of date published)

• http://www.bbc.co.uk/news/business-12196322