3.3.5 (HL)—Weighted price index

A weighted price index tracks average price change using expenditure weights for a basket.

Weights reflect importance in a base period and may become outdated as consumption changes.

Multiply price relatives by weights and interpret the index relative to its base.

If food has weight 0.4 and price rises 10%, its contribution is 4 percentage points before other items.

An index is an average, not every household’s inflation.

For each item, calculate its price relative $=(\text{current price}/\text{base price})\times100$, multiply by its expenditure weight, sum the weighted relatives and divide by the sum of weights. Example: food has weight 40 and price relative 110; other goods have weight 60 and price relative 105. The CPI is $(40\times110+60\times105)/100=107$. Relative to base 100, the basket price is 7% higher; if the previous index was 104, the inflation rate is $(107-104)/104\times100\approx2.9\%$.