ExplainersBeginner· 6 min read

How inflation is actually measured

The one thing to remember

The published number is an average of a basket that may look nothing like yours, which is why inflation feels worse than it reads.

The question

Understand what CPI is measuring, and why your personal inflation rate differs.

Figure

How inflation is actually measured works, in one picture

The same argument as the text, as a chain. Each step is what makes the next one possible.

Figure

The basket is an average, and you are not average

Housing

32%

Transport

16%

Food

13%

Recreation

11%

Energy

Everything else

20%

If you rent in a city and drive to work, your personal inflation rate in a year of surging rents and fuel can be double the headline. The number is not lying. It simply is not about you.

1
They build a basket
Statisticians survey what households actually buy and assemble a representative basket: food, rent, transport, energy, services. Each item is weighted by how much of the average budget it takes.
2
They price it, every month, in thousands of shops
The change in the total cost of that basket is the inflation rate. It is an enormous, unglamorous data collection exercise, and it is broadly honest.
3
But the basket is an average, and you are not average
If you rent in a city and drive to work, your personal inflation rate in a year of surging rents and fuel can be double the headline. The number is not lying, it simply is not about you.
'Core' inflation strips out food and energy, because they are volatile. It is more useful for spotting a trend and completely useless as a description of what it costs to live.
4
And it decides an enormous amount
Pensions, benefits, wage negotiations, index-linked bonds and central bank policy all hinge on this one number. Which is why arguments about how the basket is constructed are far more consequential than they sound.

Try it

What cash is worth laterInteractive

Inflation3%

Years25

£100 becomes

£48

Purchasing power lost

52%

Half gone after

23 yrs

At 3% a year, money loses roughly half its purchasing power in 23 years. Sitting in cash is a decision, and it has a cost.

You have got it when

You can explain why the official rate can be 3% while your own costs rose 8%.

How inflation is actually measured

How inflation is actually measured works, in one picture

The basket is an average, and you are not average

They build a basket

They price it, every month, in thousands of shops

But the basket is an average, and you are not average

And it decides an enormous amount

Read next