Price Deflation and Cpi/Rpi

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Explain how changes in the price level in the UK are measured through the use of price indices such as the RPI and CPI. (15 marks) In the UK the change in price level is measured now through the CPI or the consumer price index, which is a weighted price index that measures the monthly change in the prices of a basket of around 600 goods and services. The weighting and the goods included in the basket are determined through the family expenditure survey each year, although the expenditure of high-income households and pensioners are excluded from the survey, which attempts to look at the expenditure of the ‘average family’. The weighting of different goods within the CPI reflects the spending patterns of the average family, for example food may be weighted higher then lawnmowers as food takes up more of a families budget and is seen as more important, because of this some goods have a larger impact on CPI then their actual change because of the weighting. When a good is deemed no longer a significant part of the spending of an average family it is removed from the survey and new ones are added, for example recently craft beer and headphones where added to the basket whilst sat navs and yoghurt drinks where removed from the basket. The RPI is the other measure of price level used in the UK and was previously the main measure of inflation until it was replaced with CPI, it is measured along similar lines to CPI apart from it includes housing costs and mortgage repayments. For the most part RPI is higher then CPI but is prone to more volatility at the same time, so for example at the moment RPI is 1.6% and CPI is 0.5% but during the recession, RPI fell to -1.6% in June 2009 whereas CPI fell to its low of 1.1% in September the same year illustrating the differences between them and the increased volatility of RPI. Finally, the CPI is now used in the UK to measure price

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