Indices - Useful comparision

It seems that prices are rising almost daily at the moment, especially diary and oil derived products. One may feel that that prices are rising but how do we know?

A price index measures how prices change. Most commonly prices are compared over time but they can also be used to compare prices between geographical regions. The most commonly referred to index is the consumer price index (CPI) which in New Zealand measures a basket of goods which make up typical household spending such as food, alcohol, clothing, household utilities, health, transport, communication, recreation and education among other things. For more detail see the Statistics New Zealand site.

An index is often 'normalized' which means the user does not need to concern themselves with the units that define the data within the index because it is always in percentage terms. An index is calculated from the base year, which is in effect time zero, meaning the index will show the change between now and that base year. If you would like to know how to calculate an index view this wikipedia example.

The scope of an index can be as narrow as the user defines, e.g you could have an index that measures the price of Central Otago apricots using the spot prices of the stone fruit over a number of years. You could define a productivity index within your business to measure how productivity is changing. You can use an index to measure the change in almost anything.