What Is Consumer Price Index and What Is It Used for?

price index

Consumer Price Index is an index that measures the monthly/quarterly dynamics of prices for consumer goods and services. Prices are recorded in stores or other retail outlets. The usual method consists of calculating the average value of changes in prices of various products during one period compared to the previous one, using as weights the average amounts spent by households to purchase them. The consumer price index is an official statistical indicator usually compiled by national statistics agencies, labor ministries, or central banks. This index is published as soon as possible, usually within about ten days after the end of the next month or quarter.

Five reasons why the prices of manufacturers affect the ones for consumers

  1. First, the structure of these inflation indicators is very different. The producer price index is an index of prices in the industry, a large but not dominant sector of the national economy. The consumer price index reflects the consumer basket of households. In addition to manufactured goods, it includes services and agricultural goods.
  2. Secondly, a significant weight in the consumer price index is occupied by services, whose price dynamics are more stable than those of goods and are less affected by various temporary factors. Most of these services, with the exception of public utilities (provision of electricity, gas, etc.), are not in the producer price index.
  3. Thirdly, producer prices do not take into account taxes, markups and surcharges, which are not included in the cost of production. At the same time, they are included in consumer prices. In addition, producers’ prices are often revised due to the clarification of organizations’ data.
  4. Fourthly, it is possible to compare the dynamics of producers’ prices by type of activity, in which consumer goods are mainly produced, and the dynamics of consumer prices for the same goods. The current episode of deflation in the consumer goods production sector is the second in the last three years. Both episodes are largely similar in both the causes of price declines and their scale. The last time producer price declines occurred was in 2017-2018 and lasted almost a year. This led to a slowdown in consumer price growth, but not a decline.
  5. Finally, producer prices are very volatile and can turn negative much more often than the consumer price index. This is characteristic of both developing and developed economies. In the transition to a low-inflation regime, it is natural to face more frequent episodes of falling producer prices while consumer prices continue to rise.

Thus, we can assume that an episode of producer price deflation is not always a signal or threat of consumer price deflation.

What does it look like to calculate a price index for a retailer?

To calculate the price index, you need to follow a sequence of five steps:

Gather up-to-date and quality information about the prices and availability of competitors’ products

The data that is needed to calculate the price index and competitors’ impact on sales should be collected daily so that you can accurately track competitors’ price changes. For some highly competitive industries (e.g., electronics), competitor prices need to be collected several times a day.

Combine all collected data in one place

To work efficiently with data, you need to collect it in one place. This can be an Excel spreadsheet or specialized pricing software.

collected data

Construct a graph

This item is optional, but visualizing the data makes it easier to analyze it further because you can literally see all the options instead of looking for them in tabular rows and columns.

Supplement the chart with data on sales

As we said in the previous section, the price index is almost useless in isolation from the retailer’s current sales. Yes, it will show market data and competitor dynamics, but it won’t perform its primary function of visualizing the impact of market dynamics and competitor activity on a retailer’s sales.

collected data

Find competitor activity affecting sales

Now that you have an overview of the entire market, you can delve into the activities of an individual competitor to see those actions at the brand, category, or individual product level that have directly impacted sales.

Difficulties in Calculation

Unfortunately, the process described is quite difficult to implement. Yes, key competitors can be identified in 15 minutes, but the preparation phase takes much longer.

Most often, the retailer’s difficulties arise at the stage of competitive price monitoring. To work with a price index, you need fresh, cleaned, and repeatedly vetted competitor data. It is necessary to collect data from both aggregators and competitors’ sites, as well as to arrange for multiple quality checks of the collected information — this is not always done by retailers and as a result, they work with impoverished data.

But even when the issue of obtaining quality data is resolved, there are problems with its processing, analysis, and use. Errors caused by the human factor can occur at any stage of work: during data collection, merging, working with data, analysis, revaluation of goods…

However, all the described complexities of data collection and processing can be solved by using a solution for optimizing pricing, which includes and levels out all the possible errors (here is a detailed case of implementation of such a solution by a large retailer) during data collection, automates the process of their analysis and re-evaluation.

Use of Price Index

Modern retail is a continuous struggle for omnichannel customers. To win in this struggle, it is necessary to use the maximum available means, even if using them entails complicating the routine tasks of category or product managers.

Using information about the right competitors gives the retailer the ability to choose products for advertising, set competitive (and profitable) prices for products, predict demand and assortment management, increase sales by offering additional products to customers, etc.

Calculate the price index, study competitors’ market positioning, get granular trend data and make informed business decisions!

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