CFA Level I: Price Indices

A common method of comparing inflation rates across time is by using price indices. There are three main types of price indices, the Laspreyes index, the Paasche index and the Fischer index.

• The Laspreyes index takes a consumption basket and price chart, and calculates the value of current consumption (C_1’ x P_1”) + (C_2’ x P_2”) over the past value of consumption (C_1’ x P_1’) + (C_2’ x P_2’), where the basket of goods used (C_1’,C_2’) is in base quantities, or past quantities.

• The Paasche index uses current consumption quantities to calculate the index. [(C_1” x P_1”) + (C_2” x P_2”)]/[( (C_1” x P_1’) + (C_2” x P_2’)], where (C_1”,C_2”) is current consumption quantities.

• The Fischer index is the geometric mean of the Laspreyes and Paasche index:
  • Fischer = √(I_P x I_L)

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