RetailPriceIndexUnit36Nominalvaluev.sRealvalueNominalvalue:valuebeforeadjustmentforinflation.Realvalue:valueaftertheeffectsofinflationhavebeenremoved.RetailPriceIndexPriceindicesshowthechangeingeneralpricelevelinpercentagetermsovertime.Itmeasurethecostofliving.ConstructingapriceindexSelectingabaseyearFindingouthowhouseholdsspendtheirmoneyFindingourpricechangesConstructingweightedpriceindexSelectingabaseyearBaseyearindex=100Baseyearhavetobearelativelystandardyearinwhichtherewerenodramaticchanges.FindingouthowhouseholdsspendtheirmoneyFindouthowmostofthehouseholdspendtheirmoney(thebasketofgoodswhichrepresentpeople’sspendingpatenandcollectedeachmonth).thebasketofgoodswillbeupdatedannually.Veryluxuryandinferiorgoodswillnotbeincludedinthebasket.Thehigherproportionofepeoplespendonthegoodsthemoreweightingthegoodis.Thereforechangeinthepriceofhighweightinggoodswillhaveagreaterimpactonthepriceindex.(updatedeachyear)FindingoutpricechangesGovernmentofficialsfindoutthepricechangemonthly.Informationobtainedfromshops,postoffices,powercompany,traincompaniesandrangeofotheroutlets.ConstructingweightedpriceindexThefinalstageistomultiplytheweightsbythenewpriceindexforeachcategoryofproductsandtocalculatethechangeingeneralpricelevel.WhytheCPImayfailtomeasurethetruerateofinflationTherepresentativesampleofgoodsinthatbasketneverfullyrepresentativeofallegroupsandtypeofhouseholdintheeconomy.Difficulttomodateimprovementsinqualityofgoodsinapriceindex.Goodsinthesampleareweightedmaybeinaccurate.Governmentofficerwhocollectrawdatamaynotrecordpriceaccurately.People’sspendingbehaviorchangeovertime.CPIcalculationdonotconsiderdiscountorsecondhandpurchasing.Someitems,forexamplefuelandfood,aresubjecttoquitealotofvariation.RPIXRPIX:measurestheRPUbutexcludesmortgageinterestpayment.Easiertocompareinflationfigureinternationally.RPIYRPIY:adj