Index numbers

Index numbers are statistical averages of items selected as representative of all items of a class of economic data. Index numbers are usually designed to equal 100 for the base period and changes in their components are computed at regular intervals in an attempt to indicate general changes in a specific class of economic data.

The choice of the individual items and their weighting are of necessity arbitrary and unscientific. Index number comparisons must of necessity ignore all changes in the quality and relative importance of the individual items, including the introduction of new ones and the dropping of obsolete ones. Since most market participants are interested in specific items and not in averages, the significance of index numbers is greatly overrated. In times of inflation, index numbers for prices are at best crude and inaccurate indicators of changes in the exchange value or purchasing power of the monetary unit.