Inflation is measured by tracking how much a representative basket of goods and services costs over time. If the basket costs £1,000 in January and £1,050 in December, inflation for the year is 5%. Simple in concept, but the details matter enormously.
In the UK, the headline measure is the Consumer Prices Index (CPI). A team from the Office for National Statistics visits thousands of shops, websites, and service providers every month to record prices on around 700 representative goods and services — everything from bread and electricity to gym memberships and package holidays. These prices are weighted by how much of each item the average household spends. The CPI is the measure the Bank of England uses to assess whether inflation is meeting its 2% target.
A related but slightly different measure is CPIH, which adds owner-occupiers' housing costs (the estimated cost of renting the home you own) to the CPI basket. This is now the UK's preferred headline inflation measure.
The Retail Prices Index (RPI) is an older measure that is no longer classified as a national statistic but is still used for some purposes, including index-linked gilts and certain regulated price adjustments.
The Producer Prices Index (PPI) measures price changes at the factory gate — what manufacturers pay for inputs and what they charge for outputs. It is a useful leading indicator: when input costs for producers rise, consumer prices typically follow several months later.
Measuring inflation is harder than it sounds. The composition of what we buy changes constantly — new products appear, old ones disappear, quality improves. Statistical agencies try to adjust for quality changes, but these adjustments are inevitably imperfect. Different households also experience very different inflation rates depending on their spending patterns. A pensioner spending heavily on energy and food experiences a very different rate than a young professional whose biggest expense is rent.