Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is the underlying rate of inflation?

  1. The rate including all housing costs

  2. The RPI adjusted to exclude mortgage costs

  3. The percentage change in wages annually

  4. The inflation rate reflected in the CPI

The correct answer is: The RPI adjusted to exclude mortgage costs

The underlying rate of inflation is often represented as the rate that provides a clearer view of the general price movement in the economy by excluding certain volatile components. In this context, the correct choice is the RPI adjusted to exclude mortgage costs. The Retail Prices Index (RPI) includes various elements, including housing costs which may fluctuate considerably due to changes in mortgage interest rates. By excluding these costs, the adjusted RPI can give a more stable and realistic measure of inflation that is less influenced by temporary shocks in the housing market. This approach allows policymakers, economists, and analysts to better gauge the persistent trends in inflationary pressures within the economy, focusing on factors that are more consistent over time, such as the prices of goods and services consumed by households. The other options do not accurately capture what is meant by the underlying rate of inflation. For instance, including all housing costs would make it more subject to fluctuations, while a focus on wage percentage changes relates to income rather than consumer price changes. The inflation rate reflected in the Consumer Price Index (CPI) is a different measure altogether, often encompassing different components and a methodology for calculation that does not strictly align with the definition of underlying inflation.