Calculating Index Changes - When Prices Change Over Time
In the process of determining consumer price levels, calculating index changes will be inevitable.
Prices of goods and services can change every week - even more so in every month and in every year. In the U.S., the government monitors these changes in the prices of commodities.
Its Bureau of Labor Statistics (BLS), which is under the Department of Labor, is the one in charge of checking and assessing said price levels in the country. Every month, the BLS publishes the Consumer Price Index (CPI) report.
The CPI, as explained by QuickMBA.com, is a kind of price index pertaining to a basket of goods. This basket of goods represents what consumers would commonly buy monthly.
By calculating index changes, the BLS would know the percentage change in prices.
COPYRIGHT_WI: Published on https://washingtonindependent.com/ebv/calculating-index-changes/ by Alberto Thompson on 2022-11-14T08:44:31.232Z
The Consumer Price Index and Your Experience of Price Change
Financial site Investopedia describes an index as a kind of “tool” used to measure something, such as inflation. In this case, an index can be utilized as an economic indicator.
As for the term “index change,” (as this article focuses on calculating index changes), one good explanation can be found from Law Insider, a legal research website:
Index Change means the Producer Price Index is no longer published or the method of calculating the Producer Price Index is changed so that the Producer Price Index no longer reflects general increases in prices in the broad United States economy.
- Law Insider
It was mentioned previously that prices tend to change over a given period. One example would be gasoline. The price of gas is higher during summer than in winter (when less people drive).
Now as stated above, the Producer Price Index (PPI) shows the overall price increases of goods in America.
Index changes are about price changes.
As their respective names already suggest, both the CPI and the PPI measure price changes. The former, however, is about the prices paid by consumers while the latter deals with the prices paid to the producers.
In the Consumer Price Index (CPI) - October 2022 report prepared by the U.S. Bureau of Labor Statistics (BLS) on November 10, 2022, the index changes involved several increases.
In calculating index changes, the figures below (and the increase that happened) will be considered.
The 0.4 percent increase in the Consumer Price Index for All Urban Consumers (CPI-U), as indicated in the BLS report for September 2022, happened again in October (same percentage).
The indexes for food, electricity, and gasoline rose (the index for natural gas went down, though).
Over the month, there was a 0.6 percent increase in the food index and a 1.8 percent increase in the energy index.
In September, all items had a 0.6 percent increase. In October, they (excluding electricity and food items) experienced another increase - at 0.3 percent.
There are formulas devised when calculating index changes.
Per Ireland’s Central Statistics Office, to calculate the change in price of certain items or goods between, for example, January 2021 and December 2021, here are the steps:
1. Divide “Latest Index Number” by “Earlier Index Number.”
2. Then multiply the answer to 100.
3. Lastly, subtract 100 from the answer.
So, that would be December 2021 (the latest) Index Number divided by January 2021 (the earlier one) Index Number times 100. Finally, from the result of that equation, subtract 100.
In calculating index changes, one may use that formula.
To get the percent change, the U.S. Bureau of Labor Statistics would first get the difference of the index values of an item for Year I and Year II.
For example, Item A’s index value for Year I was 110.000 and for Year II, 128.000. Their difference is 18.000, which will then be referred to as the change in index points.
To get the percent change, divide the change in index points by the index value for Year I. Then multiply the answer to 100.
Based on the example above, that will be: 18.000 divided by 110.000 times 100. The answer is 16.4, which is the percent change.
That change in the Consumer Price Index, according to the U.S. Bureau of Labor Statistics, refers to the change in prices of the basket of goods and services in a given period of time.
For Investopedia, that will be substitution. It refers to the change in what consumers buy as a result of price changes.
From TheBalanceMoney.com, use this formula when computing for the percentage change: (New Price - Old Price) / Old Price x 100.
Calculating index changes is important as the results will serve as a guide when making economic assessments and providing economic data.
There are uncomplicated formulas available to make the computation fast and easy.
The next time people find themselves getting asked to perform a task that involves calculating index changes, they just need to use the appropriate formulas.