Index numbers are widely used to monitor aspects of the economy. Stock market performance is tracked via the FTSE 100, inflation is measured using the consumer price index and the volume of sales in shops is often tracked via the retail sales index. Given the importance attached to these statistics by academics, policy makers and commentators, it is useful to look at how these numbers are constructed and the choices involved in such a process.
Index numbers can be used to measure a range of economic phenomena. For illustrative purposes the rest of this article will focus on how index numbers are used to measure inflation. Before moving on to discuss how we measure inflation we need to be sure we are clear about what it is we are trying to measure. Then we will try to choose between the index number tools available to us.
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