What is a price or commodity index and how is it used?

January 8th, 2015

We use indices in our sourcing events all of the time and the same question always comes up from buyers when we do.

 

Todays post is by Ronald D. Southard, CEO at SafeSourcing Inc.

This author has heard a lot lately about prices indexes or indices. Every time we source something we are asked what index should we use. Although there are times when an index is helpful in sourcing in order to manage contracted pricing once a baseline has been determined versus the rise or fall of an index, that is not always the case for every product.

Here is an old post from November of 2011 where I feel the subject was described well that you might find useful.

I was reading our local paper today “The Arizona Republic”. In their MARKET TIP on page 3 of the business section they had a nice synopsis of the Consumer Price Index or CPI relative to measuring inflation. It was brief and holds true in terms of how indices are used to measure the rise or drop in prices over time. In your annual contracts you may wish to review them quarterly and have escalator language that locks in price increases or decreases versus a specific index to protect you from volatile commodity markets like the oil market.

According to the Bureau of Labor Statistics website, the Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI is used as an economic indicator, a deflator of other economic series and as a means of adjusting dollar values. The CPI affects nearly all Americans because of the many ways it is used.

To learn more about how the CPI index is used please visit the Bureau of Labor Statistics website.

If you’d like to learn more about the variety of indices and how they impact the many products that you buy for reuse as well as resale or if you are not in the business of prognostication, please contact a SafeSourcing  customer services account manager.

We look forward to and appreciate your comments.

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