ISSUES INVOLVED IN THE

MEASUREMENT OF
INFLATION
NUR AQILA HATIM BINTI YAHAYA

FIRST ISSUE
- Basket used = Purchasing habit of a typical household
- Not applicable to all people
- Ex: basket of a family with children different from family with no
children
- National figure is more widely-used measure
= may not be ACCURATE reflection for a particular area
= not ACCURATE reflect price change for a particular group if used as
basis for wage
negotiations/pension change
- Harmful for people with high cost of living
- Beneficial for people with low cost of living

SECOND ISSUE
- Errors in collection of data = Limit accuracy of final results
- IMPOSSIBLE to collect the price of all items bought by all
household, in all possible locations
- Lead to degree of inaccuracy
- Larger sample, MORE accurate = BUT TIME CONSUMING and
COSTLY

THIRD ISSUE
- Changes in consumption habits by making changes
to the basket = remove/add
- Time consuming
- If items in basket change = Limits ability to make
comparisons from one period to another
- Moreover, quality of goods changes over time
- Ex: Computer. If the computer upgrade but still in
the same basket, inflation will
but the product
is not the same

FOURTH ISSUE
- Different countries = Measure rate of inflation differently
- Hard to make international comparisons

FIFTH ISSUE
- Price change for reasons that are not sustain. Ex : seasonal
- Ex: Price of food and volatile (likely to change in a very sudden
manner) oil prices
- Lead to unusual movements in inflation rate
- Core rate of inflation = To reduce distorting effects
= But excludes food and energy prices

SIXTH ISSUE
- Other price changes which are important = To judge economic health of a
country
- So, economist measure change in price of factors of productions
needed by the economys firms
- Through Commodity Price Index = Track changes in raw material prices
- Two types of commodity price indices
a. Changes in a weighted basket of a large number of different traded
commodities
b. Particular category of commodity
Movement = Signals of cost-push pressure and may be a leading
indicator of future changes for inflation
- Through Producer Price Index = Track price of goods before retailers add
their profit margin
-