Definition of the word price index

The term "price index" refers to a statistical tool used to measure changes in the prices of a set of goods or services over time. It is essentially a weighted average of price changes, with each item in the set assigned a specific weight based on its relative importance in the overall basket of goods or services being considered. The weight assigned to each item is based on its consumption volume or expenditure share. The concept of a price index can be traced back to the late 1800s, when several economists began to explore ways to measure inflation more accurately than the traditional method of tracking changes in the price of a single item, such as a bushel of wheat or a pound of gold. In particular, Stanislas Czyszewski, an economist from Krakow, and Antoine Augustin Cournot, a mathematician from Paris, both independently proposed methods for constructing price indices in the 1880s. However, it was another French economist, Émile Léon Walrus, who is often cited as the father of price indices, thanks to his 1874 essay "On the Doctrine of Weights," in which he discussed the importance of weighting prices for different goods based on their significance to the overall price level. Since then, price indices have become a standard tool in economics and finance for measuring inflation, deflation, and other price-related trends, and are used by central banks, governments, and businesses to inform policy decisions, make investment choices, and set prices.