How is the rate of inflation calculated?

It’s not too big a problem if your income keeps rising, however. This has happened in Britain, where things are generally more expensive than in the past. The difference is that – mostly – people earn so much more money they really are better off. This is called an increase in ‘real’ (as opposed to ‘nominal’) income.

It’s quite hard to measure the level of inflation. This is for a variety of reasons. The main problem is that you will have noticed some prices rising, but a lot of others have fallen at the same time. The first clever bit of maths required is to come up with an average figure. To do so, you need an idea of the ‘average’ household and their ‘average’ purchases. Before long inaccuracies will creep in and you might not feel that you are average (and you’re not!).

It’s interesting to see what goes into the ‘basket of goods’ that the Office of National Statistics (ONS) use to make up this average figure. They update a list of 650 items to better reflect public spending habits. Fruit smoothies, muffins and portable digital storage devices have all been recently added to a typical basket of UK goods. Meanwhile, frozen vegetarian ready meals, CD singles, “stubbie” lager and 35mm camera films are to be removed. This seems to me to be a fair reflection of the nation’s changing shopping habits. See Muffins enter typical UK ‘basket’. Last year, the Office of National Statistics released a fun tool to help you work out the rate of inflation you personally experience. Find out more at Personal Inflation Calculator - ONS . You can also follow that story from The Inflation Rate in your hands - BBC.

The other significant problem in measuring inflation is that goods and services change through time, as do people’s shopping habits. The quality of most items has changed. So a car costs more in 2008 than 1978, but they’re not really the same thing…

The main index for measuring inflation is the Consumer Price Index. The Bank of England has the main responsibility for controlling inflation and they do so by adjusting monetary policy with an aim to hit an inflation target of 2% a year.

Inflation charts in pdf format
Inflation_Charts.pdf