Price index

A price index is the price of a group of products expressed as a percentage of the price of a comparable group of products at an earlier date. The Consumer Price Index (CPI), which is the most widely-used price index, is the price of the "basket" of products that is purchased by the typical consumer, expressed as a percentage of the price charged for a comparable basket at a stated base date. The CPI provides an indication of changes in the cost of living and it is commonly used as a factor to "index" past payments in order to maintain their purchasing power. It is also used as a divisor, or "deflator", that is applied to a percentage increase of a quantity measured in monetary units, such as dollars, in order to estimate its percentage had it been measured in physical units, such as gallons. Price indexes are also available for a variety of other prices including those of factory inputs and outputs, commodities and housing.

Methodology

The subject matter of a price index is normally a mixture of different quantities of each of a range of items. For the CPI, it is the mix of purchased items that is bought by a typical consumer. The price index is calculated as the weighted average of the current prices of those items expressed as a percentage of the weighted average of their base-year prices. In calculating those averages, the weight applied to each item is an estimate of the share of that item in the total of consumers’ expenditure. However, since the composition of consumer expenditure is constantly changing, a choice has to be made whether to use weights corresponding to the current mix, or to the base-year mix, or to some intermediate mix. National statistics authorities provide detailed accounts of their CPI methodologies