Evolving the measurement of inflation

How is the Office for National Statistics improving price stats?

Inflation statistics are prominent, with concerns about the scale of rising prices. How do stats offices calculate the inflation rate and what problems are there?

The basic approach

There is a ‘basket’ of around 700 goods and services. That basket covers essential items such as bread and milk. It also includes expensive purchases like cars.

Each month, local collectors go into about 150 places, gathering more than 100,000 prices. There are central collection processes for larger chain stores.

Analysts then study how over 180,000 prices change each month. Those analysts calculate a weighted average for the change. For these weights, there are expenditure estimates in national accounts and household surveys. What goes into that ‘basket’ differs over time, reflective of changing habits.

Those changes then link together in a chain across time, producing the index.

The conceptual problems of inflation

There are two different ways to think about price changes:

• Across the economy: How are prices changing in economic interactions throughout the society?
• Experienced by households: How does each household bear rises and falls in prices?