## Calculating the CPI/RPI:

- Indices express change in prices of a number of different products as a movement in a single number.
- Average of ‘basket’ of products in first year calculation or
**base year**is given the number 100. - If on average the basket rises overall by 25% next year, then index becomes 125.
- If in second year it rises another 10%, then 125 x 1.1 = 137.5 – 37.5 becomes average price rise in two year period.
- To construct a CPI, a sample of households are taken and surveyed – their spending patterns observed for 12 months which is the base year. The
**proportion of income spent on each category**is recorded. - Average prices of different goods and services (minus fuel and food) are recorded from a sample of shops.
- The proportion of income spent on each category is used to weight average prices of each type of good/service to find their weighted average prices.
- This shows how big an impact a change in price of a particular type of good or service will have on cost of living for the average household.
- The proportional of household income spent on a certain type of good/service is multiplied by the average price of the good/service purchased in the category, to generate its weighted average price – these weighted prices are then all added together, which is the overall average price for goods and services in the basket.
- The weighted total price of the basket can be compared each year to work out percentage changes in average consumer prices.