The CPI tracks a basket of spending
Definition
Consumer Price Index (CPI): the official measure of inflation, which tracks the changing cost of a fixed basket of goods and services that households typically buy.
Basket of goods and services: the representative selection of items whose prices are collected each month to stand in for everything households buy.
Weighting: the importance given to each item in the basket, set by how much of household spending goes on it.
- Prices are collected every month for the items in the basket, in shops and online right across the UK.
- The basket is reviewed every year, so items households have stopped buying drop out and newly popular ones come in.
- Weights matter because a 10% rise in the price of housing hits households far harder than a 10% rise in the price of pet food.
- Without weights the index would treat a bag of sugar and a year's rent as equally important, which would make it useless.
The index compares prices with a base year
- The base year is set to 100, so the index says how far prices have moved from that year rather than what anything costs.
- UK CPI is published on a base of 2015 equals 100, and in July 2026 the index stood at 142.9, meaning the basket cost 42.9% more than in 2015 (Source: ONS).
- The inflation rate is the percentage change in that index over twelve months, not the index itself.
- So a rising index alongside a falling rate of change means prices are still going up, just less quickly than before.
Common Mistake
- Do not read the index as a price in pounds, because it is only a comparison with the base year.
- Do not confuse the index level with the inflation rate, since the index can be high while the rate is low.
CPI has limits as a measure
- The basket is an average, so a household whose spending is unusual faces a different rate from the published one.
- CPI leaves out the costs of owning and living in your own home, which is why the ONS also publishes CPIH.
- CPIH inflation was 3.1% in the twelve months to July 2026, above the 2.9% CPI figure, because housing costs were rising faster (Source: ONS).
- Quality changes are hard to price too, since a phone costing the same as last year's may do considerably more.
- None of that makes CPI useless, but it does mean a published rate is a good average rather than any one household's experience.
Note
- CPIH is out of syllabus for this exam board.
Self review
- What does the CPI measure?
- Why are the items in the CPI basket weighted?
- What does a CPI index of 142.9 tell you, if the base year is 100?
- Why is the basket updated every year?
- Give one reason the published inflation rate may not match a particular household's experience.
