Have you ever wondered why your money does not seem to buy as much as it used to? Over time your money loses purchasing power. It does so because of inflation. Put simply inflation is the rate at which your money loses its ability to buy things. The CPI is the official measure of inflation in Ireland.

You can use the CPI to measure the decline in the value of money. For example, you might wish to check whether wages have kept pace with prices.

Table 1:

Table 1 shows that prices increased by 5.0% between March 2007 and March 2008. In other words the annual rate of inflation to March 2008 was 5.0%.

What does this really mean? It means that between March 2007 and March 2008, money fell in value by 5.0%. If I had €1 in March 2007, I would need €1.05 in March 2008 to have the same purchasing power. In other words, I would need 5c extra to be able to buy the same basket of goods and services that I bought in March 2007. Alternately, you could look at it in reverse and say I only needed 95.2c in March 2007 to buy what I need a €1 for in March 2008.

Example 1:

For every euro I had in July 2007, I would need 1 euro and 3.3c in March 2008 to purchase the same basket of goods and services. So, if I had €10 in July 2007, I would need €10.33 in March 2008. Use this formula to work it out:

Formula 1:

then

Example 2:

If I had €50 in October 2007, I would have only needed €48.03 in January 2007 to purchase the same basket of goods and services. The additional €1.97, needed to purchase the same basket of goods and services in October, reflects the increase of 4.1% in the average level of prices between January and October.

Example 3:

Suppose I had €197 to spend in December 2007. If I had waited until January 2008, I could have bought the same basket of goods and services for €196.06.

Remember -

• The CPI measures the change in the price of a basket of goods and services
• CPI measures inflation
• Inflation is the rate at which your money loses its ability to buy things