Index Numbers and Base Years

What it means when a statistic is reported as an index equal to 100 in some base year, and how to turn index readings into percentage changes.

Many economic statistics are not reported in rupees, dollars, or tonnes, but as an index number. An index takes one chosen period, called the base year or base period, and sets its value to 100. Every other period is then expressed relative to that starting point. If a price index reads 130, that means prices are 30 percent higher than in the base year. Indexes let us compare changes over time without getting lost in the raw quantities underneath.

Why use an index at all?

Some things are hard to express as a single raw number. The overall level of prices, for example, combines thousands of goods and services with different units - litres of milk, kilograms of rice, months of rent. You cannot simply add these together. An index solves the problem by tracking how the whole combination changes and expressing the result on a common scale. EconReads has a separate lesson on how the Consumer Price Index is built; this lesson focuses on how to read any index you hear about, including indexes for industrial production, wages, house prices, and stock markets.

Hearing an index reading

The number 100 is your anchor. Anything above 100 means higher than the base period; anything below means lower. The distance from 100 tells you the percentage change since the base year. A reading of 85 means 15 percent lower than the base period. A reading of 250 means two and a half times the base level.

Comparing two readings that are both far from 100 takes one extra step. The change in the index measured in index points is not the same as the percentage change, just as percentage points differ from percentages.

From index points to a percentage

Suppose a price index was 150 last year and is 159 this year. The index rose by 9 points. To find the percentage change, divide the 9 point rise by the starting value of 150, which gives 6 percent. Now suppose a different index went from 300 to 309. It also rose 9 points, but 9 divided by 300 is only 3 percent. The same number of points can mean very different percentage changes depending on the starting level.

Base years change

Statistical agencies periodically update the base year, a process called rebasing. They do this because spending habits, products, and the structure of the economy change over time; a basket of goods from decades ago may no longer reflect what people actually buy. India’s official statistics, for example, have been rebased several times over the years, and other countries do the same. When a series is rebased, the whole history is usually rescaled so that the new base period equals 100. The percentage changes between periods stay broadly similar, but the index levels themselves look different.

This means you should be careful comparing an index reading from an old report with one from a new report. If one says “the index stands at 180” and a later one says “the index stands at 120,” prices have not necessarily fallen - the base year may simply have moved.

Treating index points as percentages

A common mistake is hearing "the index rose 20 points" and assuming that means a 20 percent rise. Only when the index starts at exactly 100 are points and percentages the same. Otherwise, divide the change in points by the starting level to find the real percentage change.

Key takeaways

An index sets a base period equal to 100 and expresses other periods relative to it.
A reading of 130 means 30 percent above the base period.
Index points are not percentages; divide the point change by the starting level.
Agencies periodically rebase indexes to reflect how the economy has changed.
Don't compare index levels across different base years.