Construction and Calculation of a Price Index

Step#1: Survey Consumers/Producers etc to determine a fixed Basket of Goods

10 fish burgers, 2 shampoos and 2 bottles of wines

Step#2:Find the Price of each good in each year

Year	Fish Burgers	Shampoos	Bottles of Wine
1998	$1	$2	$15
1999	2	$3	25
2000	3	$4	30

Step#3:Compute the Cost of the Basket of goods in each year

1998 ($1 per fish burger x 10 fish burgers) + ($2 per shampoo x 2 shampoos) + ($15 per bottle of wine x 2 bottles of wine)=$44

1999 ($2 per fish burger x 10 fish burgers) +($3 per shampoo x 2 shampoos) + ($25 per bottle of wine x 2 bottles of wine) =$76

2000 ($3 per fish burger x 10 fish burgers) +($4 per shampoo x 2 shampoos) + ($30 per bottle of wine x 2 bottles of wine) =$98

Step#4:Select one year as a base year (1998) and compute the Price index of your interest ie CPI, PPI or GDP Deflator

1998	($44/$44) x 100 = 100
1999	($76/$44) x 100 = 172.7
2000	($98/$44) x 100 = 222.7

Step#5:Use the CPI or PPI etc to compute the inflation rate/deflation rate from previous period

1999	(173-100)/100 x 100 =73%
2000	(223-173)/173 x 100 = 28.90%