A price index compares aggregate prices between two chosen times. The U.S. Department of Labor, for instance, calculates a Consumer Price Index each month, which considers the spending habits of urban consumers and earners. Economists use the CPI and other price indices to calculate the inflation rate and gauge the effectiveness of the Federal Reserve's monetary policy. The government also uses the price index to set income payments, such as Social Security. To calculate a price index, consider goods' prices and quantities in the two periods.
Multiply the cost of one item in the period whose index you're calculating by its quantity in the earlier period. If, for instance, you are calculating the February index with respect to January, multiply the item's price in February by how many were produced in January.
Repeat Step 1 for every item you are taking into account.
Add together your totals from the previous steps.
Multiply the cost of one item from the reference period by the quantity that consumers bought. With this example, multiply an item's price in January by its quantity in January.
Repeat Step 4 with every other item.
Add together your totals from the previous two steps.
Divide the result from Step 3 by the result from Step 6.
Multiply the answer from Step 7 by 100. This produces the price index for February.
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