What is retail price index and how you can calculate it?

Answer 1

retail Price Index measures changes in the prices of goods and services bought for household consumption. The RPI takes a large sample of retail goods including food, tobacco, household goods and services, transport fares, motoring costs, clothing, and leisure goods and services. An increase in the index means that prices have increased on average (inflation) while a decrease means that prices on the whole have fallen (deflation).

Its calculation involves following steps:-

1. A base year or starting point is chosen. This becomes the standard against which price changes are measured.

2. A list of items bought by an average family is drawn up. This is facilitated by the Family Resources Survey.

3. A set of weights are calculated, showing the relative importance of the items in the average family budget - the greater the share of the average household bill, the greater the weight.

4. The price of each item is multiplied by the weight, adjusting the item's size in proportion to its importance.

5. The price of each item must be found in both the base year and the year of comparison (or month).

This enables the percentage change to be calculated over the desired time period.