Given its weighting of 66.66 percent, this would take the weighted inflation to 13.2 percent. Now if the bananas increase from $1 to $1.20, inflation is 20 percent. This is then multiplied by its weighting. If the price of oranges increases from $1 to $1.10, the inflation rate is 10 percent. Bananas would receive a weighting of 66.66 percent. For this example, oranges would be given a weighting of 33.33 percent. Therefore, an increase in the price of ice cream will account for a 0.5 percent increase in the overall rate of inflation.įor simplicity, let’s say every consumer buys 2 oranges and 4 bananas on an annual basis. For example, ice cream may account for 0.5 percent of a family’s yearly spend. The CPI uses the weighting of products by calculating shifting spending patterns. This information is used to determine the importance or weight, of the item categories. They are then asked to provide their spending habits every quarter over a two year period. They keep a diary listing everything purchased during a two week period.
In order to collect information on frequently used items, such as food, drink, and personal care another 12,000 consumers are chosen. Each quarter, their spending habits are recorded through an interview survey. This is conducted through surveys of over 24,000 people across the country. WRITTEN BY PAUL BOYCE | Updated 24 August 2021 How is Inflation Measured: The Consumer Price Index (CPI)ĬPI is the most common measurement to calculate inflation, which is based upon a basket of goods.
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