Legal Definitions - price index

A price index is a statistical measurement that tracks how the average cost of a specific collection of goods or services changes over a period of time. It expresses these changes as a percentage relative to a chosen starting point, often called a "base period" or "base year." Essentially, it helps us understand shifts in purchasing power or the rate of inflation/deflation by showing how much more or less money is needed to buy the same items compared to an earlier time.

• Example 1: Local Housing Price Index

  Imagine a city's urban planning department wants to monitor the affordability of homes for its residents. They could create a housing price index. They might designate the average sale price of a standard three-bedroom house in 2010 as their base year, setting its index value at 100. If, by 2022, the average sale price of a similar house has increased by 60%, the housing price index for 2022 would be 160. This clearly illustrates that, on average, homes in that city cost 60% more in 2022 than they did in 2010.

• Example 2: University Textbook Price Index

  A student advocacy group might develop an index to highlight the rising cost of educational materials. They could select a typical bundle of required textbooks for a first-year university student in 2000 as their base (index = 100). If, by 2020, the average cost of that same bundle of textbooks has increased by 75%, the textbook price index for 2020 would be 175. This demonstrates that students in 2020 had to spend 75% more, on average, to acquire the same set of learning materials compared to students in 2000.

• Example 3: Industrial Raw Materials Index

  A manufacturing company might track an industrial raw materials index to understand how the cost of their primary inputs is fluctuating. They could set the average price of a basket of essential materials like steel, plastic resins, and copper in 2005 as their base year (index = 100). If, due to supply chain disruptions and increased global demand, the average price of this same basket of materials rises by 40% in 2023, the index for 2023 would be 140. This indicates that the company now pays 40% more, on average, for its raw materials compared to 2005, impacting production costs and pricing strategies.