The Consumer Price Index

Page 1

> It measures the rate of inflation

> It's useful in wage negotiations - if prices rise you can argue you are entitled to higher wages

> Can be used to widen tax bands

> Indexation of investments - CPI is the basis on which an individual can increase insurance cover to avoid under-insurance

> It's a measure of international competitiveness

The Consumer Price Index

This measures the change in the average level of prices paid for consumer goods and services by all private households in the country

Its results are often cited as the official measure of inflation in the country.

Limitations of the Consumer Price Index (CPI)

Based on Average Level of Spending

This may not accurately reflect changes in the cost for certain individuals and groups in society

Weights Used Apply in Base Year Only

This is unrealistic as patterns of consumption change over time

Changes in Quality of Goods Not Measured

A newer car will have better features, for example, so an increase in price may be to reflect these better features, rather than an increase in cost

New Products on Market Not Included

It doesn't take into account new products that have entered the market e.g. iPhones

Switch to Cheaper Brands Not Measured

It doesn't measure the extent to which people switch to cheaper brands when prices are rising

Uses of Consumer Price Index

The Consumer Price Index