Inflation is a persistent increase in the average price level in the economy.
measuring of inflation
Inflation are typically measured by calculating a consumer price index (CPI), which measures the changes in prices over time of a representative basket of goods and services consumed by the average household. Some goods & services are given a larger weighting in the measurement of CPI because they take up a larger share of consumers’ income, e.g. housing & food.
Problems associated with the measurement of inflation
CPI is based on the purchasing preferences of a “typical” household, but this may not be applicable to all people.
1) There may be errors in the collection of data that limit the accuracy of the results. e.g. only the prices of selected outlets will be used.
2) There are changes in consumption patterns over time, which cannot always be taken into account.
3) The quality and types of goods and services change over time. e.g. the price of a newer model of computer will be higher & feed into a higher rate of inflation.
4) Changes in producer prices and commodity prices are excluded in the calculation of CPI. (Producer price index measures changes in the prices of factors of production and is useful in predicting future inflation.)
5) Some one-off events such as seasonal variations & oil price shocks will lead to unusual movements in the inflation rate and can be misleading. (A core rate of inflation that excludes food & energy prices should be considered.)
6) It is hard to make international comparisons because countries measure their inflation in different ways & include different components.
1. (November, 2010v1)
(b) Discuss the methods and problems involved in constructing an accurate measure of the rate of inflation. 
1) 答题思路：先写measure the rate of inflation 的方法，再写constructing the method 时遇到的问题。
Understanding of the means of measurement of inflation 4 marks
Discussion of the method of construction
Discussion of problems of stages and final outcome