A price index (plural: “price indices” or “price indexes”) is a numerical measure designed to help compare how the prices of some class of goods and/or services, taken as a whole, differ between time periods or geographical locations. Comparing price indices across time makes it possible to calculate the inflation rate. Comparing price indices across geographical regions makes it possible to calculate purchasing power parity measures.
The class of goods covered by a price index can be quite broad; in a consumer price index, for instance, the class of goods is roughly "things bought by a typical urban consumer". As an example of a narrower index, the United States Bureau of Labor Statistics has a price index for "steel mill products". Sometimes an index will be very specific, as in the US Energy Information Administration index entitled "Gasoline - All Grades".
By design, a price index reduces all the distinct prices for the class of goods in question to a single number. On one hand, doing this has the potential to cut through the noise and make it easy to see the big picture. On the other hand, it has the risk of hiding potentially important details; for instance, a price index can potentially increase even though a sizable minority of the prices are actually decreasing. The usefulness of a price index may therefore depend on both the nature of the particular dataset and the intended use of the index.
Price indices have several potential uses. For particularly broad indices, the index can be said to measure the economy's price level, and the extent to which there is inflation. This information is useful to central banks as they plan out monetary policy. A broad index can also be used to estimate changes in the cost of living. This can be useful in, for example, contract negotiation; one party, for instance, may be more willing to accept a certain salary if it's scheduled to automatically increase as costs go up. Price indices can also be used to help measure other economic statistics such as Gross Domestic Product.
More narrow price indices can help producers with business plans and pricing. Sometimes they can also be useful to help guide investment.
Some notable price indices include:
