- Inflation is the average amount by which the price of products goes up over a period of time, usually over a year or a quarter, although it may also be tracked over much longer periods. It is important because if prices are rising faster than average income the general public will be less well off. Conversely, if prices rise to slowly, or start to fall, businesses will struggle and may be forced to eliminate jobs.
- The consumer price index is just one method of measuring inflation. It takes the average basket of goods, which contains food, clothing, travel and other expenses, and determines how much the value of the total has increased. The only common item it does not contain are mortgage repayments.
- The CPI is an index, whereas inflation is a percentage term. Both work out at exactly the same amount, but are simply expressed differently. When a country starts measuring inflation it sets a CPI base rate of 100. The CPI then goes up and down from this base rate, meaning the CPI from year to year is still an unquantifiable figure. If the CPI goes from 185 to 189 over the course of a year the inflation rate is calculated by dividing the difference between the two numbers by the previous year's figure and multiplying by 100. In this case (189-185)/185 x 100 equals 2.16 percent. It is this percentage is the inflation rate.
- The CPI is the most commonly used tool for calculating inflation, although it is by no means the only one. The other common measure is the retail price index---or RPI---which is exactly the same as the CPI, except that it includes mortgage repayments. That is the reason the CPI is favored: If mortgage payments are excluded, the inflation rate works out to be lower. This is good for governments as they do not want people to think all prices are rising by excessive amounts.
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