wannabeeahack wrote:
not the same though are they, the Retail Price Index used for the calculations re-"indexing" are a far wider set of items than just inflation.
I think you're barking up the wrong tree a bit here - inflation and indexation mean more or less the same thing. What's important is what measure of inflation you use, and it's usually taken to mean either retail price inflation or these days there's consumer price inflation, but it could be anything else such as house price inflation, oil price inflation, wage inflation, taxi cost inflation or taxi fares inflation.
But for years if you heard the word inflation in the media then it meant retail price inflation, but they introduced the consumer prices measure because it was claimed that the retail prices calculation was misleading for the purposes required.
Which measure you use depends on the purpose you want it for - retail price inflation just provides an overall measure for things people buy in the economy, but if you want it for more specific purposes - taxi fares, for example - then a more specific measure should be used like petrol price inflation, which should roughly reflect oil price inflation, but clearly the two are measuring different if related things.
The terminology comes from the way these things are calculated, because unless you want something very simple - like tin of beans price inflation - then you need a method to come up with a plausible number.
Thus index numbers are used, which basically represent a basket of goods of the type of inflation you want to measure.
The rise in the index number represents the rise in prices, which in shorthand is called inflation. Thus inflation just means the rise in the index numbers, thus indexation effectively means 'based on the inflation rate'.
For example, if you want a figure for east of Scotland taxi fare inflation then you might use fares from Edinburgh, Fife and Dundee. Say the average fare was:
Edinburgh - £4.40 Fife - £4.00 Dundee - £5.00
Add them all together and you get a simple index number of 1,340.
Next year fares go up to:
Edinburgh - £4.50 Fife - £4.50 Dundee - £5.10
Now the index number is 1.410.
Thus the rise in the index is 5.2%
Therefore taxi fare inflation for the east of Scotland is 5.2%. The point is that while you could simply get a figure for the individual areas, a more meaningful figure should represent all the areas, and this might be used to work out a fare rise for Aberdeen, say. If you used Edinburgh alone then the inflation figure would only be 2.2%, but that is misleading compared to the other councils.
Of course, it's a lot more complicated than that - for example, because there are more taxis in Edinburgh than Fife then you could construct the index number to reflect this, because otherwise the index would be misleading if it just assumed all the councils had the same amount of taxis, as in the example above.
So retail price inflation is just the increase in the Retail Price Index (RPI) and the problem is what to include in the index numbers. It changes periodically - for example, they might take out cassette prices and replace this with CDs - and the new consumer prices index was thought up to provide a better measure by including mortgage repayments, but as I said what you include depends on what precisely you want the number for.
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