Question

5.   (2 Points) Identify two reasons why it is difficult to measure inflation. You should explain each reason you cite in one or two complete sentences. (Note: There are at least four substantive reasons you could mention).  

Answer 1

Inflation is a measure of the cost of living changes. It is measured using figures such as CPI index of consumer prices, RPI index of retail prices. The inflation calculation system typically produces a weighted product basket–based on commonly purchased goods Measuring monthly price increases. Creating an index multiplied by the weighting of the good from the price change.

Changes in product quality. Changes in product value mean that price rises may not reflect inflation, but only the fact that it is a better commodity. Computers, for instance, have a lot of apps than 10 years ago, so it's hard to compare costs because they are different products.
Shrinkflation . The value and size of products can also deteriorate. The cost of vegetables, for instance, may stay the same, but if the volume decreases, the price per gram will actually rise. Shrinkflation has often responded to rising cost-push inflation–companies are reducing the size of chocolate bars rather than raising the price.

One-off shocks may give an impression that is misleading. A rise in oil prices, for example, will result in higher inflation. But this price rise can only be temporary. Changes in taxation have a similar effect.
Which formula to use–The inflation index contains numerous different inflation indexes that include different items. Inflation indexes include CPI, CPIH, RPI and RPIX. CPI excludes interest payments on mortgages. They are included in the CPIH.

Inflation rates may vary from group to group. Increasing prices of electricity and gas can affect the elderly more than the young. Old people would therefore have a higher rate of inflation than the national average. This is relevant because pensions are connected to the index because their living costs can increase more than the prices that cause a decrease in living standards.