R02 Inflation: free practice questions

1. Question 1 of 5

   Which statement about the consumer prices index (CPI) is correct?

   Option A: It's no longer published as an official national statisticOption B: It's used to uprate index-linked giltsOption C: It includes owner occupiers' housing costs and council taxOption D: It's the measure used for the Government's 2% inflation target

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   The answer is D: It's the measure used for the Government's 2% inflation target

   The CPI is the key measure for the 2% target, measuring monthly changes in the prices of nearly 750 goods and services. It's used to increase benefits and forms part of the State Pension triple lock.

   Why the other options are wrong

   A

   That describes the RPI.

   B

   Index-linked gilts currently use the RPI.

   C

   That's the CPIH, not the CPI.

2. Question 2 of 5

   What is currently true of the retail prices index (RPI)?

   Option A: It's the lead measure of inflation used by the ONSOption B: It's still published and used for index-linked giltsOption C: It's used for the Bank of England's targetOption D: It was abolished entirely in 2020

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   The answer is B: It's still published and used for index-linked gilts

   The RPI is no longer a national statistic but is still published. It's often used for defined benefit pension increases and currently for index-linked gilts. From February 2030 it will be aligned with the CPIH.

   Why the other options are wrong

   A

   That's the CPIH.

   C

   The target uses the CPI.

   D

   It's no longer a national statistic but is still published.

3. Question 3 of 5

   Why is stagflation hard to tackle with interest rates alone?

   Option A: Lower rates would cut inflation immediately and boost growthOption B: Interest rates have no effect at all on the rate of inflationOption C: Higher rates would further weaken an already struggling economyOption D: Stagflation only occurs when rates are already zero

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   The answer is C: Higher rates would further weaken an already struggling economy

   Stagflation combines stagnant growth or recession with inflation. Raising rates, the usual answer to inflation, would hurt weak businesses further, cost more jobs and add pressure if house prices are falling.

   Why the other options are wrong

   A

   Lower rates would tend to add to inflation.

   B

   Rates are the usual route to controlling inflation.

   D

   That isn't what defines stagflation.

4. Question 4 of 5

   A saver earns 4.5% on an instant access account while inflation is 3.2%. What is their approximate real return before tax?

   Option A: About 1.3% below inflationOption B: About 7.7% above inflationOption C: About 4.5% above inflationOption D: About 1.3% above inflation

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   The answer is D: About 1.3% above inflation

   Approximate real return = nominal rate − inflation = 4.5% − 3.2% = +1.3%. Tax on the interest would reduce it further.

   Why the other options are wrong

   A

   The interest rate is above inflation, so the real return is positive.

   B

   That adds inflation to the interest rate instead of deducting it.

   C

   4.5% is the nominal rate, before allowing for inflation.

5. Question 5 of 5

   Why might an index-linked gilt fall in value in the short term, despite its inflation protection?

   Option A: Its price is driven by market factors, including conventional yieldsOption B: Its coupon is reset to zero when rates riseOption C: It loses its inflation protection if sold before maturityOption D: Its income stops rising once inflation exceeds 3% a year, under the terms

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   The answer is A: Its price is driven by market factors, including conventional yields

   Index-linked gilts protect against inflation if held to redemption, but in the short term their value is driven by market factors, including the yields on conventional gilts.

   Why the other options are wrong

   B

   There's no such reset.

   C

   The indexation is part of the gilt whatever happens.

   D

   Its payments keep rising with the index.

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