Measurement of Inflation
The rate of inflation is measured using the Retail Price Index. A retail Price Index aims to measure the change in the average price of a basket of goods and services that represents the consumption pattern of a typical household. It estimates the change in the cost to consumers of a range of commodities that they typically buy. It is usually prepared for different classes of consumers and for different areas.
The calculation of the index requires:
Such an index then estimates the cost of living or the purchasing power of incomes. If the index increases by 10% in a given period, wages would need to rise by 10% for purchasing power to remain constant. It is in this regard that trade unions and workers demand that wages should increase pari-passu with the cost of living index.