Abstract
This book is largely concerned with the use of a statistical tool, Index Numbers, to measure a particular economic phenomenon which is typically referred to as inflation. This chapter of the book will focus on what inflation is, why it matters and why it might be important that we have a good measure of the phenomenon in the form of an Official Statistic, and in turn, why it might be important to read the rest of this book! Economists will likely be familiar with much of the content in this chapter; however, it is worth making sure that we begin our discussion of the measurement of inflation on a common footing with those readers who may have less training in this area.
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Notes
- 1.
We note here that we are deliberately keeping away from the contentious phrase ‘maintaining a fixed standard of living’, which will be discussed more fully in later chapters.
- 2.
See, for example, Mankiw and Taylor (2017), p. 583 or Sloman et al., p. 262.
- 3.
Surprisingly, the definition seems incomplete compared the earlier statement referring to inflation. However, deflation might also be defined as an increase in the purchasing power of money.
- 4.
By this we mean the amounts measured in money in the time period they occur, so for example, company accounts are stated in nominal amounts, and the value of the pounds values are measured in changes across the years due to inflation.
- 5.
First discussed by economists in the seventeenth and eighteenth centuries.
- 6.
This now seems like a very high rate of inflation in the UK. However, in living memory inflation was at this level for several years.
- 7.
This is named for Irving Fisher who was the first to specify the relationship algebraically.
- 8.
For a brief biography of Friedman’s impact on economics see the address on his 90th birthday made by Bernanke (2002).
- 9.
For a readable account of this argument, which is not written with only academics in mind see Chap. 7 in Friedman and Friedman (1980).
- 10.
The letters are published, along with the Chancellor’s responses, see http://www.bankofengland.co.uk/monetarypolicy/Pages/letters.aspx.
- 11.
- 12.
See for example, Vodafone’s use of RPI in updating the price of contracts, see https://www.vodafone.co.uk/explore/costs/rpi/.
- 13.
This states that pensions will increase by the lower of the annual increase in the CPI, average wages and 2.5%.
- 14.
For more information on the Teaching Excellence Framework, see http://www.hefce.ac.uk/lt/tef/.
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O’Neill, R., Ralph, J., A. Smith, P. (2017). What Is Inflation?. In: Inflation. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-64125-6_2
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