# How to create a price index

## Price index

A price index is used to determine the rate of price increase in an economic area. Price changes of a certain group of goods, the so-called “shopping basket”, are recorded: The price level for a certain period is set equal to 100. The price changes are related to this. For example, if the index is at 101.4 points at a later point in time, this means an inflation rate of 1.4 percent.

Price index in Germany

The most important price index in Germany is the consumer price index. It is determined by the Federal Statistical Office in Wiesbaden as the so-called "Laspeyres index" (named after the French mathematician Étienne Laspeyres, who developed this statistical recording method). The so-called base year is used as a comparison value, which is usually redefined within a period of five years. The consumption quantities are determined in the base year. For this purpose, the individual groups of goods such as food or housing are assigned a proportion of total consumption measured at the point in time at which the goods are added to the shopping basket.

Concepts for the formation of the price indices

In addition to the Laspeyres concept, the Paasche concept is the most common for determining inflation or deflation in an economic area. According to the recording method developed by Hermann Paasche, the price of a shopping basket in the reporting year is compared with the price of the same shopping basket in the base year. The two methods differ in the choice of the point in time of the underlying consumption quantities - for Laspeyres the base year is decisive, for Paasche the reporting year. The Paasche index is rarely calculated in official statistics, as the regular updating of consumption quantities required for this is too time-consuming. In addition, the price developments of the different years are difficult to compare due to the fluctuating consumption volumes.

Forms of price indices

In addition to the consumer price index, indices for producer prices for commercial products, for wholesale products, for construction prices, and for export and import prices are determined in Germany. The so-called Harmonized Consumer Price Index makes the inflation measurement of the individual European countries comparable. Among other things, it is used to measure the Maastricht convergence criterion “price stability”, which is used to assess whether a member state can join the European Economic and Monetary Union. As with the determination of the consumer price index, the consumption structure and all factors that determine the price are kept constant. However, the countries are required to update their goods structure as soon as a good gains market significance within the European economic area. In addition, the countries must check the quality and weighting of the goods in the shopping basket while the index is running.