The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015. Annual percentage change in prices - CPI - Food and fuel - Other goods and services Which one of the following statements is correct about the UK’s inflation record between September 2011 and January 2013? Based on the data shown, the UK experienced: A) deflation B) disinflation C) falling average prices D) falling money supply With reference to the data provided, explain the process of calculating the rate of inflation in the UK using the Consumer Prices Index. Refer to the concept of weights in your answer.

A-Level Edexcel Economics A Macroeconomic Objectives & Policies: The chart below shows UK inflati

The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015 - Edexcel - A-Level Economics A - Question 3 - 2017 - Paper 2

Question 3

The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015. Annual percentage change in prices - CPI - Food and fuel - Other g... show full transcript

Worked Solution & Example Answer:The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015 - Edexcel - A-Level Economics A - Question 3 - 2017 - Paper 2

Step 1

Which one of the following statements is correct about the UK’s inflation record between September 2011 and January 2013?

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Answer

Based on the chart data, the correct answer is B) disinflation. Disinflation refers to a reduction in the rate of inflation, indicating that while prices were still increasing, the rate of increase was slowing down during this period.

Step 2

With reference to the data provided, explain the process of calculating the rate of inflation in the UK using the Consumer Prices Index.

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Answer

To calculate the rate of inflation using the Consumer Prices Index (CPI), several steps are involved:

Understanding the CPI

Inflation Rate Measurement: The CPI measures changes in average prices for a representative basket of goods and services consumed by households over a given period.
Survey of Prices: Regular surveys gather data on the prices of these goods and services.
Base Year Reference: The CPI compares current prices to those in a base year, allowing for an assessment of changes over time.

Weighting the Items

Proportion of Spending: Each item in the basket is weighted according to its proportion in consumers' overall spending. This reflects the impact of the price changes on the average household.
Analysis of Changes: For example, if food and fuel prices rise significantly, this can drag down overall CPI if these categories hold considerable weights in the basket.

Application of Weights

Calculation Example: A household expenditure survey is completed to identify spending patterns, which informs how weights are assigned. In January 2015, it was noted that CPI inflation was recorded at 0%, indicating stable prices when weighted by expenditure.