Measurement of Inflation
The rate of inflation is measured using the Retail Price Index. A retail Price Index aims to measure the change in the average price of a basket of goods and services that represents the consumption pattern of a typical household. It estimates the change in the cost to consumers of a range of commodities that they typically buy. It is usually prepared for different classes of consumers and for different areas.
The calculation of the index requires:
- Selection of commodities to be included in the consumers basket
- Selection of the base period weights for each commodity
- Date on prices of the commodities in the current period and in the base period
Such an index then estimates the cost of living or the purchasing power of incomes. If the index increases by 10% in a given period, wages would need to rise by 10% for purchasing power to remain constant. It is in this regard that trade unions and workers demand that wages should increase pari-passu with the cost of living index.