How CPI Is Constructed and Calculated

Which organization conducts the survey used to construct the CPI?

The Office for National Statistics (ONS).

What do households record in the ONS survey for CPI?

What they buy, quantities, and income spent.

What is created from the survey to track prices?

An imaginary consumer basket.

About how many items are included in the CPI basket?

About 700 items.

Why is a representative basket of goods and services formed?

To track changes in prices of typical household purchases.

How are items in the CPI basket weighted?

Weights from 1 to 0 based on income share spent.

What determines the weight of a good or service in the CPI basket?

The percentage of household income spent on it.

Why are heavier weights given to some basket items?

They take a larger share of household income.

How is annual inflation calculated from index numbers?

By finding the percentage change between yearly index numbers.

How often is the CPI basket updated?

Yearly.

Why is the CPI basket updated every year?

To reflect changing consumer habits.

What is demand‑pull inflation?

A rise in general price levels from excessive aggregate demand.

When does demand‑pull inflation occur according to the notes?

When excessive AD exists and the economy is not at full capacity.

What is cost‑push inflation?

A rise in general price level from increased production costs.

What supply‑side change is linked to cost‑push inflation?

A leftward shift of the Aggregate Supply (AS) curve.