Price indices were calculated using both year 1 and year 4 as separate base years, and inflation rates were derived based on year 1 as the base year. The calculations show that the inflation rate represents the percentage change in prices relative to the base year, which remains consistent irrespective of the base year chosen for indexing.
Calculating Price Indices and Inflation Rate
To calculate the price indices for a basket of goods over four years with year 1 and year 4 as base years respectively, we use the following formulas:
For Year 1 as the base year: (Price in Current Year / Price in Base Year) × 100
For Year 4 as the base year: (Price in Current Year / Price in Base Year) × 100
To calculate the inflation rate based on the first price index:
Inflation Rate = ((Index in Current Year - Index in Previous Year) / Index in Previous Year) × 100
Year 1 index = (£940 / £940) × 100 = 100
Year 2 index = (£970 / £940) × 100 = 103.19Year 3 index = (£1000 / £940) × 100 = 106.38Year 4 index = (£1070 / £940) × 100 = 113.83
For Year 4 as the base year: (Price in Current Year / Price in Base Year) × 100
To calculate the inflation rate based on the first price index:
Inflation Rate = ((Index in Current Year - Index in Previous Year) / Index in Previous Year) × 100
Using the second price index, the inflation rate calculations would simply be relative to year 4 instead of year 1, but the inflation rate would still represent the change in prices over time, and in terms of percentage change, it remains consistent regardless of the base year chosen.