Comprehensive and Detailed Explanation (paraphrased from CIPS L4M2 content)
CIPS L4M2 explains that general inflation indices (like consumer or retail price indices) are based on a basket of goods and services for the whole economy, not tailored to a specific company’s imports or input mix.
For an engineering business importing from the USA, its price changes will depend on:
Specific industrial input price indices (e.g. metals, components, specialist goods),
Exchange rate movements GBP/USD,
Sector-specific factors (technology, capacity, freight, tariffs).
Therefore, simply “adding a published inflation index” to last year’s prices cannot precisely predict next year’s prices, particularly when:
The index may include irrelevant items like food, clothing, local services, etc.
It may not reflect the specific mix of industrial inputs or the effects of exchange rates.
Thus:
Option A correctly explains the limitation: the inflation index may include products and services that are not relevant to the company’s purchases.
Option B mentions price adjustment formulas (which can be more precise if designed well), but the question emphasises whether using a general index alone is precise – option A goes straight to the core reason.
Options C and D describe partial truths (indices can show general trends and give a quick check) but they do not support precise forecasting.
Relevant CIPS L4M2 areas:
Use and limitations of inflation indices in cost forecasting
Factors influencing prices in international procurement (currency, indices, market conditions)
Building realistic cost assumptions in a business case
