by manufacturers, is subtracted from the change in the observed price paid by consumers.

Fisher ideal index

A superlative index derived as the geometric mean (the square root of the product) of the Paasche index and the Laspeyres index.

Fixed-weight index

An index constructed as the ratio of the cost of purchasing a basket of goods and services at the prices of one period (or in one location) to the cost of purchasing that same basket at the prices of a subsequent period (or different location). The set of weights assigned to the prices of items in the basket remains the same in each period (or location).

Geometric mean formula

A method for combining price quotes, currently used in the CPI for about 61 percent (by weight) of basic item indexes, that uses a set of fixed-expenditure (as opposed to quantity) proportions as weights for averaging individual prices within a basic index. Fixing relative expenditure proportions implies that customers substitute among specific items (in response to changing prices) in such a way that the share of expenditure on each item category remains constant.

Hedonic quality adjustment

A method that uses regression technique to separate out the effect of changed item quality on its observed price by establishing a relationship between a good’s characteristics and its price. See direct hedonic method, indirect hedonic method.

Homothetic preferences

A theoretical assumption positing that a consumer ranks different bundles of goods the same no matter what her level of living so that the rate at which a person is prepared to trade one good for another is independent of whether the person is rich or poor; it also implies that, as people become better off, they simply scale up their purchases without changing the pattern of consumption.

Index (chain) drift

The divergence between a chained index and a fixed-weight index caused by the linking of indexes with different strata weights.

Index formula

A formula that dictates the exact way in which prices and expenditure shares are combined to calculate a price index.

Indirect hedonic method

In hedonic quality adjustment, a technique that involves adjusting, post hoc, the observed price difference between an outgoing item and a replacement item based on the portion of the price change attributable to a changed characteristic. The magnitude of the adjustment is determined by