Measures of Inflation

These goods and services include:

• Essential goods (such as food items, hygiene products, housing supplies, clothing, etc.).
• Housing and cars.
• Rental services (car, accommodation, etc.).
• Luxury goods.

The RPI is calculated by measuring the changes in the prices of items in the baskets of goods.

1. Survey. In the UK, the expenditure survey is carried out by the ONS (Office for National Statistics). This survey includes questions about what the families buy, the prices of goods and services, the quantity they buy, where they bought, and what amount of their income they spend on goods and services.
2. Definition of all the goods and services in the basket. Once the details of surveys are collected, the baskets of most common goods and services are formed. These baskets help the government understand the average buying capacity of a family in the country in a given period. In the UK, the government forms about 700 baskets of goods and services.
3. Weightage of all the goods and services baskets. All the goods and services in the baskets are weighted as a percentage of income spent on the particular goods or services between 0 and 1. After finding the total price of the basket, the base year is selected with the index value of 100. To calculate the index, items that are included in the shopping basket are weighted according to their importance. The more people spend on it, the higher the importance and thus the weight of the item.
4. Calculation of the CPI. After finding the value of the basket and establishing the base year, the CPI is calculated using the following formula:

1. The CPI method may miss out on some of the goods and services consumed as they may not be included in the basket.
2. Since the data is generated by the survey method, there are opportunities for inaccuracies in the data.
3. Comparisons with the other countries' inflation indexes may be difficult as every other country may be using a different method.
4. If the baskets of goods and services are changed and are not constant, it gets difficult to compare the data over a period of time.
5. The rate of inflation may differ from individual to individual. The goods and services bought in the basket may differ as well.

1. Monetary policies: when inflation goes up, the central banks usually raise the rate of interest. The increase in interest rates reduces demand, which results in low economic growth and reduces demand-pull inflation. Sometimes, the government may resort to extreme measures like the demonetisation of currency or the issue of new currency. Demonetization helps to curb black money in the market.
2. Fiscal policy: fiscal measures help the government to a large extent to control inflation. These are some measures a government can take to control inflation: Increasing taxes: the government may resort to increasing the tax rates to control inflation. With the higher tax rate, the rate of personal expenditure reduces or is controlled. Also, the people who save and invest may receive incentives. Tax evaders should also be heavily penalized to get the money back into the economy. Increasing savings: encouraging savings will reduce personal expenditures. In fact, in developing countries, to encourage people to save more, the central banks offer higher interest rates on savings and fixed deposits. Budget control: governments aim to spend less compared to the revenue generated, which helps them to create a budget surplus. This helps the government to reduce the deficit financing.
3. Supply-side policies: these increase the competitiveness in the economy. The government may opt for providing tax reliefs to get more investments. This may result in more firms entering the market, which will increase supply in the economy and help to control units so eventually the price rise will decrease.
4. Wage control: sometimes a trade union’s bargaining power may be very high to bargain for higher wages. At such times, limiting the wage rates can help to control inflation. However, this can be a short-term solution as such policies may hurt the workers and affect the level of production eventually leading to lower production and less supply.
5. Increasing production: increasing the rate of production for consumers' goods and raw materials can as well be an adaptive measure to reduce inflation. Better technology, subsidies on products and raw materials, and fewer import duties on raw materials can help increase production.