How do statisticians turn a shopping basket into an inflation rate?

Statisticians turn a shopping basket into an inflation rate by pricing the same imaginary basket again and again and watching what it costs. A consumer price index, or CPI, is the weighted average price of a market basket of goods and services that households buy. Collectors gather prices, often every month, from a sample of shops and service providers. Then the annual percentage change in the index is used as the measure of inflation.

An English economist named Joseph Lowe first proposed the idea in 1822. His fixed basket approach was simple: price a list of goods in one period, then price that same list in the next. If the basket costs 3 percent more, prices have risen 3 percent. To make the series easy to read, the index is rescaled so the reference, or base, year equals 100.

The word "weighted" matters because not every item counts equally. The weights reflect what households spent on those products in the preceding year, so things people spend a lot on, like housing or food, move the index more than things they buy rarely. Countries get those spending figures from regular household-expenditure surveys. At the very bottom level, a statistician may simply average the prices of the sampled products, say men's shirts sold in department stores in San Francisco.

The number matters because a CPI is used to adjust wages, salaries and pensions for inflation. It is a useful tool, though not a perfect measure of inflation or of the cost of living.