Definition
The term price index refers to a normalized average price of certain goods and / or services in a given geography and at a point in time. Price indices are designed and analyzed to understand how prices change over time or vary between geographies.
Explanation
A price index is a benchmark measure that allows analysts to understand how the price of goods and / or services varies over time or between geographies. Broad based indices allow economists to understand how well an economy is performing and the impact of prices on the cost of living. Several of the more well-known price indexes appear below, some of which help to guide monetary policy decisions by the Federal Reserve:
Consumer Price Index: the consumer price index measures the changes in the price of a basket of consumer goods and services.
Employment Cost Index: the employment cost index tracks the changes in the cost of labor.
Export / Import Price Index: the export and import price indices measure the average change in goods and services that are either imported into or exported from the United States.
GDP Deflator: the gross domestic product (GDP) deflator measures price inflation or deflation relative to a base year.
Producer Price Index: the producer price index measures the average prices received by domestic businesses for their products and services.
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