introduction

Price index
A price index (plural: “price indices” or “price indexes”) is a normalized average (typically
a weighted average) of prices for a given class ofgoods or services in a given region, during a given
interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ
between time periods or geographical locations.

Price indices have several potential uses. For particularly broad indices, the index can be said to measure
the economy's price level or a cost of living. More narrow price indices can help producers with business
plans and pricing. Sometimes, they can be useful in helping to guide investment.

A consumer price index (CPI) is a measure estimating the average price of consumer

goods and services purchased by households. A consumer price index measures a price change for a
constant market basket of goods and services from one period to the next within the same area (city,
region, or nation).[1] It is a price index determined by measuring the price of a standard group of goods
meant to represent the typical market basket of a typical urban consumer. [2] Related, but different, terms
are the United Kingdom's CPI, RPI, and RPIX. It is one of several price indices calculated by most
national statistical agencies. The percent change in the CPI is a measure estimating inflation. The CPI
can be used to index (i.e., adjust for the effect of inflation on the real value of money: the medium of
exchange) wages, salaries,pensions, and regulated or contracted prices. The CPI is, along with the
population census and the National Income and Product Accounts, one of the most closely watched
national economic statistics.

A Producer Price Index (PPI) measures average changes in prices received by domestic producers for
their output. It is one of several price indices.Its importance is being undermined by the steady decline in
manufactured goods as a share of spending.[1]

History of early price indices

No clear consensus has emerged on who created the first price index. The earliest reported research in
this area came from Welshman Rice Vaughan who examined price level change in his 1675 book A
Discourse of Coin and Coinage. Vaughan wanted to separate the inflationary impact of the influx of
precious metals brought by Spain from the New World from the effect due to currency debasement.
Vaughan compared labor statutes from his own time to similar statutes dating back to Edward III. These
statutes set wages for certain tasks and provided a good record of the change in wage levels. Vaughan
reasoned that the market for basic labor did not fluctuate much with time and that a basic laborers salary
would probably buy the same amount of goods in different time periods, so that a laborer's salary acted
as a basket of goods. Vaughan's analysis indicated that price levels in England had risen six to eightfold
over the preceding century.[1]

While Vaughan can be considered a forerunner of price index research, his analysis did not actually
involve calculating an index.[1] In 1707 Englishman William Fleetwood created perhaps the first true price
index. An Oxford student asked Fleetwood to help show how prices had changed. The student stood to
lose his fellowship since a fifteenth century stipulation barred students with annual incomes over five
pounds from receiving a fellowship. Fleetwood, who already had an interest in price change, had
collected a large amount of price data going back hundreds of years. Fleetwood proposed an index
consisting of averaged price relatives and used his methods to show that the value of five pounds had
changed greatly over the course of 260 years. He argued on behalf of the Oxford students and published
his findings anonymously in a volume entitled Chronicon Preciosum.[2]