Index Numbers

Abstract

A price index is a measure that summarizes the change in the prices of a basket of goods (or a group of inputs) from one time period to the next. A Consumer Price Index (CPI) is used by policy makers to estimate the inflation rate, which is then used, for example, to make cost-of-living adjustments. A price index is also constructed to measure the difference in prices in two different locations, in which case it could be used to compensate an employee for relocation. A Producer Price Index (PPI) is used by policy makers and businesses to estimate the price changes that affect the production side of the economy. In the United States, the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA) compute a host of indexes for many categories (e.g., materials, energy, labor productivity).