Glossary term
Price Index
A price index measures how prices for a basket or group of goods and services change over time.
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What Is a Price Index?
A price index measures how prices for a basket or group of goods and services change over time. It turns many individual prices into one index number so changes in the overall price level can be tracked.
Common examples include the Consumer Price Index, the Personal Consumption Expenditures price index, producer price indexes, import and export price indexes, and the GDP price index.
Key Takeaways
- A price index measures price change for a defined basket or group.
- It is usually expressed relative to a base period.
- Price indexes are used to measure inflation and deflation.
- Different indexes can tell different stories because they cover different goods, services, weights, and populations.
How a Price Index Works
A price index starts with a base period and compares later prices with that base. If an index rises, the basket costs more than it did in the base period. If it falls, the basket costs less.
The current basket cost is the cost of the measured basket in the current period. The base period basket cost is the reference cost. Multiplying by 100 turns the ratio into an index number.
Common Price Indexes
Index | What It Tracks |
|---|---|
CPI | Prices paid by consumers for a representative basket |
PCE price index | Consumer prices across a broad spending measure |
PPI | Prices received by domestic producers |
GDP price index | Prices for goods and services produced in the United States |
What to Watch
A price index is only as meaningful as the basket and method behind it. Coverage, weights, substitution, quality adjustments, geographic scope, and timing can all affect the result.
That is why two inflation measures can differ without either being useless. They may be answering different questions.
The Bottom Line
A price index is a tool for measuring price change over time. It is essential for inflation analysis, but it should always be read with an understanding of what basket, population, and method it represents.