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Index numbers, prices and inflation measurement

What is an Index Number?

Index numbers measure changes or differences and are used in a variety of contexts. The Office for National Statistics (ONS) produces index numbers principally in the field of economics. Economists are interested in how changes in the monetary value of economic transactions can be attributed to changes in price (to measure inflation) and changes in quantity (to measure sales volume or economic output). Index numbers typically measure these changes over time. However, index numbers can also be used to make other comparisons, such as between regions of the UK.

Mathematically, an economic index number is an average of the many different changes in price or quantity of the goods and services included in the index. There are many different valid ways of determining this average and consequently, many different possible estimates of average price and quantity changes. It is therefore important that index numbers are calculated in a way which is appropriate for their intended use.

Aims

  • To provide a source of expertise on the formulation of index numbers and related topics

  • To provide advice and quality assurance to producers of indices

  • To carry out research into new methods

  • To provide training

Many of the index numbers involved in the team's work relate to the measurement of price and wage movements, that is, to inflation measurement. These index numbers include the high profile Consumer Price Index, Retail Price Index and Average Weekly Earnings, all of which are central to the analysis and control of inflation.

The team also advises on other major price indices, such as the Producer Price Indices and Services Producer Price family of indices. However, index number expertise is also relevant to quantity indices, such as the Retail Sales Index, Index of Production, Index of Services and other quantity indices used in, or produced for, National Accounts.

Current and planned areas of work

Quality assurance of National Statistics is a major and developing role for methodologists. The Index Numbers, Prices and Inflation Measurement team is involved in a variety of new developments related to index numbers, providing guidance on best practice and appropriate methods, as well as ensuring that the developmental work meets National Statistics quality standards.

Recent work has included: estimating measures of accuracy for movements in the Retail Prices Index and Average Weekly Earnings; assessing proposals for the inclusion of a measure of owner occupied housing costs into the CPI; supporting the production of a back-series for Average Weekly Earnings.

Current work includes: investigating the effect of the seasonal adjustment process on estimates of the standard error of movement of indices; reviewing the averaging methods used for combining price relatives for low level aggregates in price indices

 

Content from the Office for National Statistics.
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