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Price Index

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A price index measures the changes over time in prices paid by consumers, producers, or some other group. The Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics, is the most widely used US price index. Put simply, suppose in year 1 it costs consumers $50 to buy a typical basket of goods and services. In year 2, because of inflation, the same basket costs $52, or a 4% increase. Using a base price index of 100 for year 1, the price index will be 4% higher in year 2, or 104. If there's deflation instead of inflation, the price index will go down instead of up. To make valid price comparisons over time, ideally a price index should always use the exact same basket of goods and services. But new products and lifestyle changes will require adjustments in the "typical" basket used to compute the price index. Despite this drawback, a price index like the CPI is a valuable tool for adjusting workers' wages, child support payments, retiree payments, etc. for price changes.



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