What is a price index?

A price index measures the average price of a basket of goods and services in one period relative to a base period, which is set at 100.

What does the Consumer Prices Index measure?

It measures the change in the average price of a representative basket of goods and services bought by households.

How is the basket of goods for the Consumer Prices Index decided?

It is based on a survey of household spending, and items are added or dropped each year so the basket reflects what people currently buy.

Name two ways the Retail Prices Index differs from the Consumer Prices Index.

The Retail Prices Index includes housing costs such as mortgage interest payments and council tax, and it uses a different averaging formula, both of which usually make it the higher figure.

Edexcel A-Level Economics B 9EB0

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The Economic Cycle

Price indices and the rate of inflation

3 things to know
Papers 2 and 3

Overview

Price indices and the Consumer Prices Index, the basket of goods and its weights, the Retail Prices Index, the Bank of England's target, calculating inflation from index values, the limitations of the index as a cost of living measure, core inflation, falling inflation with rising prices, base effects, and price collection.

What you need to know

Answer each one before you reveal it.

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Key term

Why are the items in a price index weighted?

Key term

Which index is used for the Bank of England's inflation target, and what is the target?

Numbers

A price index rises from 105.0 to 108.15 over a year. Calculate the rate of inflation.

Questions from this subtopic

Each one with the model answer underneath.

1
What is a price index?
Model answer
A price index measures the average price of a basket of goods and services in one period relative to a base period, which is set at 100.
2
What does the Consumer Prices Index measure?
Model answer
It measures the change in the average price of a representative basket of goods and services bought by households.
3
How is the basket of goods for the Consumer Prices Index decided?
Model answer
It is based on a survey of household spending, and items are added or dropped each year so the basket reflects what people currently buy.
4
Why are the items in a price index weighted?
Model answer
Households spend far more on some items than on others, so a price change in a heavily weighted item should affect the index more.
5
Name two ways the Retail Prices Index differs from the Consumer Prices Index.
Model answer
The Retail Prices Index includes housing costs such as mortgage interest payments and council tax, and it uses a different averaging formula, both of which usually make it the higher figure.
6
Which index is used for the Bank of England's inflation target, and what is the target?
Model answer
The Consumer Prices Index, with a target of 2% a year.

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

CSpending on credit-financed items falls.

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