Recently in United Kingdom- a powerful and wealthy economy, there has been an issue being discussed with growing worry. The problem, not so strange to most countries in the world, is inflation, more specifically “the surge in UK inflation rate” in 2005. I will be evaluating on the article “UK inflation drops to Bank target” by the BBC which only focuses on this problem.
The main issue in the article is the drop in the inflation rate in 2005 in three successive months, what causes have led to such a decrease after months of increasing inflation, what actions have been taken to bring down the rate of inflation and the effects that such a drop created.
The major concepts involved in the article are inflation itself, CPI, RPI, inflation rate, cost push inflation, interest rate. The first concept, inflation itself is actually a sustained increase over a period of time in the general price level, in other words a fall in the real purchasing power of money. To understand about inflation, another concept is involved which is CPI: The consumer price index (CPI)-the measure of the consumer price level. What is CPI? CPI reports the cost of a fixed “market basket” of consumer goods and services over time. The formula of calculating CPI for a particular year is found as follows:
Price of the most recent market basket in the particular year
CPI = *100
Price of the market set out to be the base market for comparison
The article is also involves the concept of RPI which is retail price index-It is “an average measure of change in the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is compiled and published monthly”,(National statistics-UK). CPI excludes a number of items that are included in RPI. The CPI however includes the residents of institutional households such as student hostels, and also foreign visitors to the UK while RPI does not. They also have specific differences in price measurement. But, in terms of their basic usability, there is little to choose between them. Both are published each month, to a common timescale, and are subject to minimal revisions.
However, the CPI coverage of spending and households is based on the National Accounts and so the CPI benefits from greater coherence with macroeconomic data and makes for better comparisons of inflation in different countries. Furthermore CPI is more commonly used in other countries such as United States. Therefore in this article analysis, I will mainly use CPI, a more common method of measuring inflation.